Investors Scramble for Safety as Markets Test Bottom

A retest of the November lows for the Dow industrials has investment pros worried about a worst-case scenario that could send stocks plunging even further.

David Karp / AP

With the market focus much stronger these days on technical levels than fundamentals, the Dow tripping below the Nov. 20 level of 7,552 could set off a wave of selling that in turn would drag the other indexes down as well.

Only the Dow has moved into retest position, with the composite index of 30 industrial stocks closing Tuesday just a shade above the recent low. The S&P 500 and the Nasdaq are both still considerably higher than their respective November depths of 752 and 1,316, but analysts worry that any breaching by the Dow could spread.

"We're not testing the lows just yet—it doesn't mean that we won't," says John Buckingham, chief investment officer and portfolio manager at Al Frank Investment Management of Laguna Beach, Calif. "Much is going to depend on the flow of the news. The news has been just awful. Just when we think we're going to have a solution to the problems, we get smacked down."

With the continuing flow of troubles in the banking industry and a perception that the government has fumbled its opportunities to address the problem, many advisers are saying a retest of the lows is likely, though estimates on how soon that will happen vary.

Strategically, the trend in investing remains toward safety. Gold continues to be a strong momentum play as a hedge against dollar volatility. And the US dollar is benefiting from the trend, having recently hit multi-week highs or better against the euro, yen and pound sterling.

Also, a series of analysts have released research showing an expected swell in higher-grade corporate debt and a move away from stocks as world governments move to prop up troubled companies.

Fund managers have gone underweight on equities while simultaneously cutting bond positions, even as expectations for economic growth are on the upswing, according to the monthly Banc of America Securities-Merrill Lynch poll.

"There was a sharp spike in the global growth outlook and profit outlook. There's a lot of hope there," said Gary Baker, head of the EMEA strategy group at Banc of America Securities-Merrill Lynch. "But wariness is manifesting in the lack of commitment to equity allocations. People haven't got high conviction."

If the Dow does break its lows, the expectation is that it could fall to the 7,200 area or lower, said Matthew Tuttle, president of Tuttle Wealth Management.

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"There's enough that could go wrong that could drive us down there," Tuttle says.

Keeping with his contrarian investing strategy, though, Tuttle is holding long exchange-traded funds for the immediate future, as he does not think the market will break its lows immediately.

Once it does find a new low, he's going to be playing ETFs that short long-term Treasurys as the stock market turns.

"We think that if the market can find its legs, the short Treasury trade is going to be a great trade," Tuttle says. "There's going to be potentially a couple great trades this year where investors can get back (to profits) quickly."

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