What drives the market down?

I know, I know … "selling." And when people sell en masse, bad news is often to blame. But big, sharp declines aren't generally triggered by widely expected bad news -- that tends to be "priced in." Investors account for it as they buy and sell, based on their expectations. In fact, the arrival of the news can sometimes lead to a rally, once folks' worst fears are replaced by actual knowledge.

But the unexpected turns rallies into declines, and slow declines into crashes. If General Electric (NYSE:GE) were to show signs of serious financial weakness, or if General Motors were to file for bankruptcy protection, that wouldn't be entirely unexpected. Either would be shocking news from a historical perspective, but we've all seen those possibilities coming for some time now.

But unexpected things like the recent swine flu cases are another matter entirely. How well can the market digest news like that?

It'll be educational, at least
Consider: The S&P 500 is up almost 30% since the dismal days of early March, but the jury is still out on whether this is an actual sustainable recovery or just a "bear market rally." Personally, I've been thinking that the optimism (or maybe relief) that has driven recent buying seems pretty thin -- and I believe that the market will head back south in a hurry at the first sign that things are worse than expected.

Perhaps the flu will be that sign, although it's too early to be sure whether we're looking at a relatively small problem or a big one. But even if flu-related troubles subside, another unexpected shock could very well puncture what still looks to me like a fragile rally.

And if you're a long term investor, that could be great news.

Preparing for the bear's resurgence
Honestly, I don't know whether the market will return to its recent lows anytime soon. But I think it's possible, and I'm preparing for it by putting together a watch list of stocks that I'd love to buy -- if only they were a bit cheaper, like they were in early March.

Here are some of the names I've been looking at in recent days:


CAPS rating

Price on Mar. 6

Recent price





Waste Management (NYSE:WMI)




Royal Dutch Shell (NYSE:RDS-A)




Lincoln Electric (NASDAQ:LECO)




Foster Wheeler (NASDAQ:FWLT)




Perini (NYSE:PCR)




Recent price as of market close on 4/28/09. Source: Motley Fool CAPS, Yahoo! Finance.

These aren't recommendations, just companies I'm keeping an eye on right now. If you think oil prices are likely to go back up eventually, Shell -- or alternatively, another Big Oil firm like ExxonMobil or BP -- is worth a very close look, should the market (and/or the price of oil) dip again. Shell, 3M, and Waste Management all recently raised their dividends -- always a signal to take a closer look at a company.

Arc-welder leader Lincoln Electric has fallen sharply with the global construction slump, but its terrific financial condition and long-term global growth potential make a compelling story. It's arguably cheap now -- but if it gets cheaper on a market dip, I'm going to find it hard to resist. Likewise with global construction giants Perini and Foster Wheeler, the latter of which is also something of an oil play -- oil and gas-related construction is a big part of its business.

The upshot
Whether it's the flu or something else, unexpected bad news could puncture this fragile-looking rally and send markets back down sometime in the weeks to come. I think that's more likely than not, and since I'm a long-term investor with a basically optimistic outlook for stocks, I'm keeping an eye on a number of good opportunities that could become great opportunities in a broad market decline. Are you doing the same? If so, drop me a note or comment below and let me know what you're watching.

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Fool contributor John Rosevear owns shares of BP. Lincoln Electric, 3M, and Waste Management are Motley Fool Inside Value picks. Waste Management is a Motley Fool Income Investor selection. Try any of our Foolish newsletters free for 30 days. The Motley Fool has a disclosure policy.