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In an Uncertain Market, Defensive Investing is Smart – And Profitable

By , Contributing Writer, Money Morning •

For U.S. investors looking to profit in the near term, the best offense may be a good defense.

"Defensive investing" becomes a mantra for investors who are seeking to navigate periods dominated by high risk, slow growth or excessive uncertainty. Given that the current market outlook probably contains an element of each of those scenarios, a strategy that includes elements of care and caution will make for a wise course of action.

This is actually a healthy thing, and will likely include a pause in the broader market. But all indicators point to the prospective pause being just that – not a new bear market, just a time out as overfed risk appetites take a breather before being reinvigorated.

Despite the emphatic negative trading session we saw on Friday, most of last week was rather buoyant, with a net gain in the broad market averages. Yet measures of internal market health continued their slow deterioration, with much more volume appearing on down days than up days.

My belief: U.S. stocks are in the process of remedying the overbought condition created by the big upward move in the first week of the year, as well as the overbought condition that's visible on some monthly charts.

Investors seeking to profit as they navigate this stretch should look at the following two strategies.

First, if you are considering exceptionally risky stocks or exchange-traded funds, make sure that you can make a very strong case for doing so. If you can do so, that's one thing. If not, however, this is probably not the right time to be buying high-beta, or volatile, stocks and exchange-traded fund (ETFs) without a really good reason.

That's not to say that investors should steer clear of the market. As we await the market's afore-mentioned reinvigoration, the situation still looks promising for more defensive sectors, such as real estate investment trusts (REITs) and energy pipelines, meanwhile, as long-term measures of demand intensity and selling pressure remain constructive.

In fact, let me reiterate a statement that I made to Money Morning readers less than two weeks ago: Now's a great time to look closely at commercial real estate (CRE). In fact, if you're seeking specific investment ideas for that sector, check out Money Morning later this week when it features my in-depth report on this promising – but much-maligned – sector.

The Week in Review

Monday: Stocks started the second trading week of 2010 with more gains, but the performance was less than stellar as a majority of the gains were focused on larger, industrial stocks. We're starting to see some real performance divergences as traditionally defensive sectors gain at the expense of more cyclical stocks, a characteristic of market tops since the March low.

Tuesday: The U.S. trade balance in November deteriorated a little more than expected due to higher oil prices. This will put a smaller damper on fourth-quarter gross domestic product growth.

Wednesday: The U.S. Federal Reserve's latest Beige Book of economic conditions reported that the recovery continues to slowly spread. Also encouraging were signs that the manufacturing sector is becoming more optimistic about growth prospects in the coming months.

Thursday: Retail sales posted a surprise decline in December, falling 0.3% over November, compared to the consensus estimate for a 0.4% increase. The results were heavily weighed by a fall in vehicle sales. It's more than possible that we're now paying back the big demand increase we had over the summer due to the government's "Cash-for-Clunkers" program.

Friday: Consumer price inflation remains subdued. Industrial production continued to grow in line with expectations. Consumer sentiment slipped slightly.

The Week Ahead

Monday (Yesterday): Markets closed for Martin Luther King Jr. holiday.

Tuesday (Today): A quiet day on the data front. The National Association of Home Builders will report on housing market conditions. Some key companies reporting earnings: Citigroup Inc. (NYSE: C), CSX Corp. (NYSE: CSX), Cree Inc. (Nasdaq: CREE), and Forest Laboratories Inc. (NYSE: FRX) .

Wednesday (Tomorrow): Another housing report, this time new housing starts. Also, a report on producer price inflation is likely to show little change. Major companies reporting earnings.: AMR Corp. (NYSE: AMR), Bank of America Corp. (NYSE: BAC), Coach Inc. (NYSE: COH), eBay (Nasdaq: EBAY), F5 Networks (Nasdaq: FFIV), Jefferies Group Inc. (NYSE: JEF), Morgan Stanley Inc. (NYSE: MS), Starbucks Corp. (Nasdaq: SBUX), U.S. Bancorp (NYSE: USB), Wells Fargo & Co. (NYSE: WFC), Xilinx Inc. (Nasdaq: XLNX).

Thursday: The Conference Board publishes their index of leading economic indicators for December. Earnings releases: American Express Co. (NYSE: AXP), Capitol One Financial Corp. (NYSE: COF), Fifth Third Bancorp. (Nasdaq: FITB), Goldman Sachs Group Inc. (NYSE: GS), Google Inc. (Nasdaq: GOOG), Intuitive Surgical Inc. (Nasdaq: ISRG), Western Digital (NYSE: WDC), Xerox Corp. (NYSE: XRX).

Friday : No economic reports. Earnings: Air Products & Chemicals Inc. (NYSE: APD), Exelon Corp. (NYSE: EXC), General Electric Co. (NYSE: GE), Harley-Davidson Inc. (NYSE: HOG), Johnson Controls Inc. (NYSE: JCI), Kimberly-Clark Corp. (NYSE: KMB), McDonald's Corp. (NYSE: MCD), Merck & Co. Inc. (NYSE: MRK), Schlumberger LTD (NYSE: SLB), SunTrust Banks Inc. (NYSE: STI).

[Editor's Note : For more insight on global-investing profits, hot portfolios, and the best investment opportunities around the world, check out The Money Map Report.]

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