Though December is historically one of the stock market's best months, 2008 could be a volatile exception.
Most market analysts have hopes for at best a tepid performance as the market closes its worst year since the Great Depression. While the Thanksgiving holiday saw stocks stage their best five-day run in 75 years, there's scant hope a sustained upside run will carry through the balance of the year.
"We probably will continue to see the incredible volatility that we've been seeing," says Ryan Detrick, an analyst at Schaeffer's Investment Research in Cincinnati. "Unfortunately we do think the market will continue to drift lower over the intermediate term, and that includes December."
That doesn't mean there won't be ways to make money.
Detrick himself thinks privately run education companies should benefit from laid-off workers looking to go back to school (See his picks below).
And short-dated corporate and municipal bonds also remain popular among investment experts for the duration of 2008 and into the year ahead. Still others are betting on home builders to make a comeback following a miserable two-year run that should be capped by plummeting mortgage rates.
Most agree that the current climate favors stock-picking over broad-based index plays, and many advisers are saying that diversified portfolios with a bias against risk are vital until the economy stabilizes and the market becomes safe again.
Video: Jack Bouroudjian talks about the markets.
"At these low levels I would tend to say you'd want to be seeking out high-quality companies for longer-term investment opportunities, not just looking to flip on a weekly or daily basis," says Sam Stovall, chief investment officer at Standard & Poor's, who told CNBC he is nonetheless calling for a "downer in December."
Too Much Optimism?
Ironically, Detrick thinks one of the main problems with the market is a refusal by investors to accept that things are really bad.
As such, they tend to be too eager to call bottoms and get overly enthusiastic when markets show any signs of recovery. Legg Mason's star stock-fund manager, Bill Miller, became the latest to join the bandwagon, declaring Wednesday that the "bottom has been made" in stocks and sparking a market rally.
That has prevented full-scale capitulation, when retail investors finally bail out of the market and a true bottom can be formed, Detrick says.
"We've seen a lot of speculative call-buying when we see these bounces," says Detrick, referring to the options purchase that occurs when an investor thinks a stock is heading higher. "When people jump in on these vicious bounces to the bullish side, that's not how bottoms are formed."
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Overall, Schaeffer's remains net short of the market, meaning that it believes stocks as a whole are likely to fall. In particular, Detrick says he's fearful of commodities and the big technology names, which he said are attracting a lot of options activities on the call side under the reasoning that stocks like Google , which has dropped more than 60 percent in the past year, are undervalued.
Instead, stocks could retest their October lows and fall even further before a true market turnaround.
"We wouldn't be surprised to see it break those (lows) and maybe that will get major fear coming in and people will stop trying to pick bottoms," Detrick says. "We want to see skepticism, some put-buying coming in."
Of the stock plays Detrick likes, he's looking at secondary education providers Apollo Group and Strayer Education and advising clients to hedge using exchange-traded funds that benefit from moves lower in the indexes.
"There are not too many things we like on the long side," he says.
Playing the Builders, Playing it Safe
Making responsible plays in the market, then, will require patience as the smog begins to clear.
The CBOE Volatility Index continues to be at stratospheric levels, so investors who think the market is ready to turn around could be in for a rude surprise when sentiment shifts and the market has one of its 500-point drops that have become almost standard fare in the latter half of the year.
"December is a very difficult time to put money to work. When you talk to fund managers they're still talking about capital preservation," says Jack Bouroudjian, chairman of Capital Markets Technologies. "The appetite for risk is starting to come back. We're seeing it in the mortgage market. But for us to get a really solid foundation this market needs to do some work, and it's probably going to be another month or two of these amazing swings."
While that's happening, some market pros are looking for sectors that have been beaten up and are poised for long-term gains, such as the housing market.
"If you're a short-term investor then I think you take advantage of ... a short-term pullback. If you're a long-term investor, two or three years, I think it's a heck of a buying opportunity," says Rick Pendergraft, analyst at Investors Daily Edge newsletter. "If you look at strong companies with strong balance sheets you can get them at great, great prices."
Pendergraft believes home builders have done well to reduce inventory and costs and are ready to bounce off their lows.
But even in that case, Pendergraft is advocating a cautious play, buying the SPDR S&P Homebuilders exchange-traded fund rather than acquiring shares of individual companies. The ETF is comprised of the entire S&P builder index.
"They're not just building homes right and left," Pendergraft says of the industry leaders. "They've done a very good job of lowering their inventory."
Playing it Even Safer
Elsewhere in investing, many advisers will continue to look for safe havens through December, buying high-quality debt that may not provide incredible returns but at least guards cash positions and keeps powder dry until the environment gets safer.
In fact, some experts believe the best bet is to maintain a long-term horizon and ignore the daily gyrations of the market.
"It seems like there's some buying interest around 8,000," Dennis P Barba Jr., managing partner of the Oxford Group of Raymond James Associates in Cleveland, says of the Dow Jones industrials. "But my guess is as good as anybody else's."
Instead of guessing, Barba is sticking with a strategy that he has employed since the market began its downturn.
"I really haven't changed my position since July of '07 when we were extremely cautious with new money that came in," he says. "We're in short-term corporates (bonds) and still like municipals when there's dislocation in the markets."
Like many others in the investing field, Barba is biding his time until the basics of the economy and the market get stronger.
"Time is the one thing that no one is willing to give it, especially when there's this much volatility," says Kevin Ferry, of Cronus Futures Management. "It's hard to look out past those big waves into calmer waters."