Is the bear market rally over?

Is this the end of the great bear market rally?

Markets across the world took a tumble yesterday, with the FTSE 100 ending down 1.5% at 4,645, and the Dow Jones off by nearly 200 points. So why the big slide? As with most such market moves, there were plenty of stories you could pin the fall on after the fact.

Japan exited recession, but the second quarter GDP figures weren't as good as hoped. Economic data in the States disappointed on Friday. The Chinese stock market is slipping back into bear market territory. Take your pick.

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So is this the start of something bigger, or just a short-term correction? Time will tell. Here's what to do in the meantime...

It's easy to find reasons for markets to have fallen or risen in hindsight, and market commentators do it every day. But most of the time, there's no single event that can be blamed for the markets ups and downs.

For example, Japan's slightly disappointing GDP figures have been blamed by some for yesterday's slip in global stock markets. But if markets had risen instead, you might have seen pundits today talking about markets being boosted by news that yet another G7 economy had left recession behind.

There's plenty for investors to worry about, but nothing new

Sure, there are plenty of things for investors to worry about. And it may be that those worries are starting to catch up with them again. The slide in the Chinese stock market amid fears that credit will be tightened is rippling out into the commodity markets too, as investors fret that recent demand from China has been down to stockpiling, rather than any real need for yet more raw materials.

And disappointing news on the US consumer last week was a wake-up call for anyone who hoped that the worst was behind us. American shoppers have been one of the biggest drivers of demand in the global economy for years. They won't be easy to replace.

But none of these concerns is new. They just happen to have forced their way to the front of investors' minds for the time being. We suspect there could be a bit more of a struggle between the bears and the bulls before the market makes a decisive move downwards.

In any case, chasing the daily ups and downs of the market is for traders. To us, it's better if you can buy stocks when they look decent value, and then eventually you should profit when the market catches up with you.

What looks good value now?

So what looks good value just now? As we noted a few weeks ago: Don't buy a tracker - stick with defensive stocks, Jeremy Grantham of GMO, one of the few people to call the market extremely accurately over the past couple of years (including the bounce), now reckons that markets are roughly at fair value'.

In his view, "high quality" US stocks are among the few assets that still look undervalued. The rally has been mainly led by cyclical stocks those that are sensitive to economic growth prospects. These firms were the ones that fell furthest during the crash, hence the rally being dubbed a "dash for trash" by sceptics. This has left defensive stocks, which are less exposed to the economic cycle, trailing in their wake, and looking decent value.

We've been tipping blue chips from various parts of the world since late last year as the crash was still unfolding. Now US investment newspaper Barron's has come up with a list of 12 US-listed stocks that it believes fits Grantham's "high quality" description.

We've recently tipped US telecoms giant Verizon (NYSE: VZ) see here, Cash in on America's telecoms monopoly, for more. Among the stocks that Barron's tips, we think Wal-Mart (NYSE: WMT) a stock we've also tipped in the past is well worth a look. It's the biggest retailer in America, and it caters to the "value" end of the grocery market, which has seen it do well as the consumer cuts back. The stock is actually down since the start of 2009, as investors have favoured more cyclical retailers, but with life remaining tough for the US consumer, we suspect that Wal-Mart will come back into favour before long.

Another interesting-looking play is drug maker Abbot Labs (NYSE: ABT). It's also down on the year-to-date amid concerns about its key drug Humira. But with a dividend yield of around 3.5% (generous by US standards the S&P 500 average is around 2.5%) and a forward p/e of just under 11, it looks worth considering if you don't already have a large weighting of pharmaceutical companies in your portfolio.

The dollar seems to be a "safe haven" for now

Now for British investors, buying US stocks with sterling obviously comes with currency risk. However, although there are many reasons to be bearish on the dollar in the long term, we suspect that now's probably a reasonable time to get exposure to the US currency. As we noted early last week (Today's biggest contrarian bet - the US dollar), bearishness on the greenback has probably hit a peak, and if markets continue to slide, the dollar is likely to rise it's perceived as something of a "safe haven" for now.

In other words, adding a few underappreciated US blue chips to your portfolio right now, could be a very sensible move, particularly if you don't already have exposure to many overseas assets. Even if Wall Street takes a tumble, the currency effect may well go your way.