What the Pros Say: Handle Rally with Care

Rallies have boosted markets, but experts say investors must choose carefully and follow the classic rules of diversification and understanding their portfolio, as there is still downside potential.

Trust Your Common Sense

The traditional rules still hold -- make sure you only buy things you understand, hold a reasonable amount of cash and be diversified. Wilbur Ross, chairman & CEO of WL Ross & Co. believes if investors follow these common sense rules, they will do fine.

Beware of De-leveraging

Despite the rally in markets, David Costa, Dean at Robert Kennedy College warns investors to be cautious because of the de-leveraging process.

This Is Not the Bottom

"We don't think it's the bottom at this point. There could be significant selling pressure in the market, not just until the end of the year, but for the next two to three years as financial institutions continue to offload risky assets and go through the process of deleveraging, " Aaron Smith, managing director of Superfund Financial said about the direction of the Dow Jones Industrial Average and S&P 500.

Stay Cautious

Despite the overnight rally in U.S. stocks, David Fernandez, MD at JPMorgan, says it is best to stay cautious as nothing has changed fundamentally.

Too Shy to Buy

Fund managers were extremely pessimistic in Merrill Lynch's last survey, with worries about liquidity and Chinese growth dominating, Karen Olney, senior European equity strategist at Merrill Lynch said. Lack of information is the reason why trading is almost non-existent, Olney added.

Basics Out the Window?

Generally you should stick to the basics: look at fundamentals, look at underlying growth. But now the markets have become so complex and so technical, Karen Olney, chief European equity strategist at Merrill Lynch said. Olney calls for further regulation.

Focus on Balance Sheets

Investors are focusing more on companies' balance sheets, notes Nicholas Yeo, investment manager at Aberdeen Asset Management. He tells CNBC that traders feel more confident if firms have enough resources to tide through the financial crisis.

Waiting for a Good Buy

As valuations continue to tumble, Paul Dowling, principal analyst at East and Partners says institutions are waiting for a good buy.

Chinese Banks Attractive

As Chinese bank shares have suffered massive selloffs this year, Warren Blight, an Asian banking analyst at Fox-Pitt Kelton tells CNBC which lenders top his list.

More Downside for Chinese Banks

China's banking sector is poised for further downside in the next 6-12 months, says Dorris Chen, head of financials research at BNP Paribas. She tells CNBC why the sector is starting to rid itself of the delusion of a healthy and sustainable growth story in China.

Still in a Bear Market

"There has never been a rally on the Dow of more than 300 points in an actual bull market. These gigantic moves have only taken place in bear markets since 1995," Daniel Frishberg from Laffer Frishberg warned after the US stock rally on Tuesday.

Market 'A Barometer, Not a Thermometer'

"The market is a barometer, not a thermometer. No one says things are going well now, they just have to go less bad than the day before," said Manny Weintraub, president of Integre Advisors. Bernd Weidensteiner from Commerzbank also commented on the condition of the market.

Nasdaq Is Near Bottom

The Nasdaq is at or near a bottom and a 90-day counter-trend move should lift the index from here, Bill McLaren from Independent Trader told CNBC.

© 2012 CNBC.com