A retest of the November lows for the Dow industrials has investment pros worried about a worst-case scenario that could send stocks plunging even further.
With the market focus much stronger these days on technical levels than fundamentals, the Dow tripping below the Nov. 20 level of 7,552 could set off a wave of selling that in turn would drag the other indexes down as well.
Only the Dow has moved into retest position, with the composite index of 30 industrial stocks closing Tuesday just a shade above the recent low. The S&P 500 and the Nasdaq are both still considerably higher than their respective November depths of 752 and 1,316, but analysts worry that any breaching by the Dow could spread.
"We're not testing the lows just yet—it doesn't mean that we won't," says John Buckingham, chief investment officer and portfolio manager at Al Frank Investment Management of Laguna Beach, Calif. "Much is going to depend on the flow of the news. The news has been just awful. Just when we think we're going to have a solution to the problems, we get smacked down."
With the continuing flow of troubles in the banking industry and a perception that the government has fumbled its opportunities to address the problem, many advisers are saying a retest of the lows is likely, though estimates on how soon that will happen vary.
Strategically, the trend in investing remains toward safety. Gold continues to be a strong momentum play as a hedge against dollar volatility. And the US dollar is benefiting from the trend, having recently hit multi-week highs or better against the euro, yen and pound sterling.
Also, a series of analysts have released research showing an expected swell in higher-grade corporate debt and a move away from stocks as world governments move to prop up troubled companies.
Fund managers have gone underweight on equities while simultaneously cutting bond positions, even as expectations for economic growth are on the upswing, according to the monthly Banc of America Securities-Merrill Lynch poll.
"There was a sharp spike in the global growth outlook and profit outlook. There's a lot of hope there," said Gary Baker, head of the EMEA strategy group at Banc of America Securities-Merrill Lynch. "But wariness is manifesting in the lack of commitment to equity allocations. People haven't got high conviction."
If the Dow does break its lows, the expectation is that it could fall to the 7,200 area or lower, said Matthew Tuttle, president of Tuttle Wealth Management.
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"There's enough that could go wrong that could drive us down there," Tuttle says.
Keeping with his contrarian investing strategy, though, Tuttle is holding long exchange-traded funds for the immediate future, as he does not think the market will break its lows immediately.
Once it does find a new low, he's going to be playing ETFs that short long-term Treasurys as the stock market turns.
"We think that if the market can find its legs, the short Treasury trade is going to be a great trade," Tuttle says. "There's going to be potentially a couple great trades this year where investors can get back (to profits) quickly."
Oil, Gold and Technology
Another trade he likes is oil, which he says could double from its current levels by the end of the year.
Enthusiasm for the oil trade is growing on the belief that the market has become oversold, like many other commodities.
"Everything the governments, not just in the US but around the world, are doing are very inflationary, which is negative for their currencies and positive for commodities," said Uri Landesman, head of global growth strategies at ING Investment Management.
"The biggest beneficiary short-term is gold, then it will get into other metals and energy as well," Landesman added. "For that story to have legs you're going to need some recovery in demand, which I believe will come from China and hopefully the US will join in."
But Landesman remains concerned about stocks finding news lows, particularly in light of a government bailout plan that seems to run counter to last year's Troubled Asset Recovery Plan. Banks are now being pushed to pay back their TARP money and avoid government assistance or face the prospect of nationalization.
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"Most financial professionals are saying if you're going to do this why do the TARP in the first place," Landesman said. "They have accomplished exactly the opposite of what they intended to do."
Landesman is watching the 789 level on the S&P 500. If that level breaks, he sees the index finding 741, a fear that has caused him to move cash positions to a "reasonably high" level.
"I'm pretty bullish longer term given the upside-downside potential, but the market doesn't act well here," he says.
Buckingham, of Al Frank, also holds a bullish long-term view for the market, but that doesn't mean he doesn't have misgivings for the days ahead.
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Technology should offer some solace to the troubled markets, he says, remaining cautious while believing there are good values out there.
"I'm not saying I should back up the truck and mortgage the ranch and buy stocks because we're going to have a successful retest of the Dow. To me this is a bottoming process. It may take another few months and frankly maybe take into the second half of the year until we put in the quote, unquote, bottom," Buckingham says.
"For those with a longer-term investment horizon, this period in my view will go down as one of the best buying opportunities of our generation."
- Reuters contributed to this report.For more stories from CNBC, go to cnbc.com.