How to play the coming bear market

Clearly market psychology has changed dramatically over the past few weeks. The market is down 5% and looks likely to fall much further.

I am hedging my long positions by shorting some stocks that seem likely to fall harder than the rest of the market. Clearly, the market is being lead down by the housing and financial stocks. It is probably too late to short the housing stocks, but there is still plenty of room to short some of the financial stocks.

Goldman Sachs (GS) is down 20% from its high, but could certainly fall much further. There is so much fear about what their exposure to the sub-prime sludge may be that another 20% fall to around 140-150 is not unlikely.

Blackstone (BX) is another stock in the sweet shot for shorting. It is down 30% from its IPO, but also could go much lower. The entire hedge fund model relies on easy money and a healthy stock market- in order to re-IPO the companies they have taken private.

My favorite short pick right now is Sears. It is a perfect combination of a hedge fund ( a la Eddie Lampert) and a retailer closely tied to the housing market. They have fallen about 30% from their high, but have missed earning two quarters in a row and should fall much lower. It appears that Lampert has again proven the Peter principle - he has risen to the level of his maximum incompetence. He may have been a great Hedge fund manager, but he has no idea how to turn around a retailer.