Grumbling with the bears

As a bear, or as someone trading off of fundamentals rather than just price momentum, it's painful to wait for the turn. But as the 2007 example proved, patience can be profitable virtue.

In 2007, the stock market was hit as financial stocks were crushed by the fallout from the subprime bubble bursting. That was the catalyst the bulls couldn't ignore. People didn't know what it was like to invest in an environment where home prices were falling.

Similarly, we're about to experience what it's like when the government can no longer support a still-fragile economy with low taxes and ample spending. Earlier this week, Barclays Capital strategist Barry Knapp noted that Wall Street's hopes for earnings growth this year rest on the sectors most at risk from fiscal tightening out of Washington. With stock valuations at 2012 peaks, he believes "this may not be the optimal time to commit new capital to the equity market."

AKS © StockCharts.com

I share that opinion. This is not the time to take new positions, and you may want to book profits and move to cash or Treasury bonds.

I've taken it one step further and am recommending outright shorts in areas of emerging weakness such as AK Steel (AKS), Century Aluminum (CENX), and U.S. Steel (X). All are economically sensitive materials stocks that will be early casualties of a new downtrend on a realization that, in fact, we still face serious problems.

And if you think the party can continue, at least consider rotating out of cyclicals and into the defensive areas that were showing strength this week -- such as health care, consumer staples and utilities. They will help protect you if the next thing we see is a pullback -- or, as I fear, something much worse.

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At the time of publication, Anthony Mirhaydari did not own or control shares of any company mentioned in this column. He has recommended that his money-management clients short AK Steel, Century Aluminum and U.S. Steel.

Be sure to check out Anthony's new money management service, Mirhaydari Capital Management, and his investment newsletter, the Edge. A free, two-week trial subscription to the newsletter has been extended to MSN Money readers. Click here to sign up. Mirhaydari can be contacted at anthony@edgeletter.com and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.