At about 2pm yesterday, the real selling began.



All 30 Dow stocks were in the tank. My entire screen was blinking red. At the close, the Dow was down more than 416 points.

For those keeping track, on the NYSE, there were 49 stocks that were down for every one that rose.

Further, more than $600 billion in market value was wiped out in one fell swoop in yesterday's action.

In other words, it was a thorough pummeling.

So what caused the sell-off?
No less than a dozen people asked me that question yesterday.

My answer was that a number of things were responsible.

The Chinese markets took a roughly 9% hit on fears that the government might crack down on the speculation that's driven that market. In addition, stock markets across Europe were pounded.

Plus there was a bombing at U.S. military base in Afghanistan were Vice President Cheney was visiting.

And finally, there remains uncertainty over whether or not the U.S. economy may be headed into a recession.

Beyond that, the durable goods numbers that came out yesterday added a fair amount of fuel to the fire. Orders were down 7.8% in month of January, well north of the roughly 3% drop that most analysts and economists had been expecting.

That's a clear indication that people are becoming more and more reluctant to spend their money. Not a good sign!

In short, there was a lot of action that the market had to digest yesterday, and the sell-off was the reaction.

So what's going to happen from here?
My hunch is that we aren't out of the woods yet.

This Wednesday morning, Q4 GDP numbers were released, and they weren't good. They showed that the U.S. economy grew at an anemic 2.2% clip in the quarter, while growth in the 3.5% range had largely been anticipated. Again, not a good sign!

In addition, major sell-offs like the one we had yesterday aren't usually isolated. In other words, they are not typically limited to one trading day.

Plus, if you consider that we haven't had a correction of any size for the last couple of years, its logical to assume that the going could be kind of tough in the weeks ahead.




So what should investors do?
The first rule is not to panic. I would not recommend going entirely to cash. Instead consider paring down riskier investments and jettisoning emerging biotech stocks, and micro cap holdings.

I'd also consider diversifying into European stocks, but I'd stay away from emerging market funds. Think quality.

Why Europe? Interest rates there are generally stable, and the economies are chugging along at a solid clip. Sure, a dramatic slowdown in U.S. spending can and would hurt those economies, but I think you'd still be better off than if all your eggs were in the American basket.

If overseas investing isn't your cup of tea, I'd suggest domestic companies with lots of overseas exposure and diverse revenue streams. I also like certain staple stocks that tend to do well in the face of recession.

Among my favorites are:

Altria Group (MO)
Anheuser-Busch (BUD)
General Electric (GE)
Procter & Gamble (PG)
Kimberly Clark (KMB)

The Bottom Line
There's no need to hide out in your bomb shelter just yet, but be more conservative with your investments.

Pare down your more speculative plays, and if possible keep some cash on the sidelines. Because again, I suspect that the worst may not be over.

Oh, and pray for a rate cut at the next FOMC meeting on March 21! That's what we really need to get this market moving again.



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Tickers in this Article: MO, BUD, GE, PG, KMB

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