How Investors Can Survive In a Stock Picker's Market

Find the Non-Participants

While financials, the big tech names and consumer discretionary stocks have performed extremely well since the rally off the March lows, some of the market's most reliable names have sat it out.

Procter & Gamble and Hewlett-Packard are two such companies that are due for a lift as some areas retreat and others gain the favor of investors looking for relative bargains, says John Massey, senior vice president and portfolio manager at AIG Sun America Asset Management in New York.

P&G is up less than 12 percent during the rally, trailing the S&P 500 performance by about half, while HP has gained 27 percent in the upswing but still trades at just 11 times earnings.

"If this rally is true these companies will probably play catch-up at some point," Massey says. "We're skeptical of the market rally so far. We don't necessarily think the economy has turned just yet. We think it will be a long basing period for the market."

Massey also includes pharmacy chain CVS on his list of companies that he thinks should do well now.

Hungry for Stocks? Try Restaurants

Economic weakness as well as a somewhat stiff trading range are two phenomena Sparks wants to ride, and he sees certain restaurant chains also benefiting in the environment.

For instance, Buffalo Wild Wings has nearly doubled in the past two months.

Similarly, a desire to find less expensive modes of entertainment should be beneficial for mail-order video rental firm Netflix .

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And Sparks even extends the argument to car care, where a company like AutoZone will get more business from people hanging onto their cars longer.

"The end of the bear market may be characterized by more of a grinding phase than a panic button," he says. "If that's the case there are going to be certain sectors, pretty narrow, that would outperform."

Others Will Wait

Investors have been busy putting money to work since the rally begin, but the new rangebound market has tempered some of that enthusiasm.

Portfolio managers who were adding to positions in recent weeks are holding their positions until the aforementioned pullback hits its stride. Some say that will happen after the bank stress tests are disclosed, while others believe it could come with an unexpected jolt of dismal economic news.

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"There's no fundamental good news, and the fact that we had a six-week rally, which we haven't had since the 1930s, and we moved up quite a bit suggests we need some retracing for this to be long-term stable," says Michael Kresh, president of M.D. Kresh Financial Services in Islandia, N.Y. "It's probably relating to money chasing the markets and trying not to be the last person to get involved in this rally, which is not sensible for a long-term investor."

In the interim, then, investors likely will look to be nimble until there are signs of a long-term stabilization with the economy.

"We still haven't corrected one of the basic imbalances driving the recession. Housing prices are likely to continue falling," Nomura's Pandl says. "There are some green shoots, but it's not quite spring yet."

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