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TORONTO (Reuters) - Canadian-listed stocks have tumbled almost 10 percent from their record high in less than a month, and market watchers say there is a real possibility of a slide into bear territory, as measured by a 20 percent drop.
"I can't rule it out, given that just about every other major market in the world is in bear territory," said Doug Porter, deputy chief economist at BMO Capital Markets.
"We've seen the Toronto Stock Exchange .GSPTSE shed almost 10 percent in the space of three weeks and another 10 percent is certainly believable."
In the United States, the Dow Jones industrial average <.DJI > closed in bear territory on July 2, pushed by inflationary concerns over higher oil and food prices, and by mounting credit losses in the financial sector.
Those same suspects brought the bear knocking at Britain's FTSE 100 .FTSE on July 10.
The S&P/TSX composite is heavily skewed towards cyclicals, such as energy and base metals, which are in hot demand and have helped limit losses on the index. But it is also heavy on financials, which are down around 18 percent this year.
The test over the next few months that will determine whether the TSX gets pushed into a bear market will be what emerges as the biggest threat to global markets: continued high energy prices or an even deeper credit crisis.
"With the global environment we're dealing with, I think a good case can be made on both sides, and I don't think it's obvious which one is going to dominate," said Porter.
Douglas Davis, president of Davis-Rea, is even less sanguine. He sees the TSX falling as much as another 15 percent from current levels.
"I think we're in a bear market," Davis said. "You can call it a bear market or a down market, and maybe you don't want to change the wording from 'down' to 'bear' until it's down 20 percent, but the fact is the market is going down."
Davis adds it is highly likely that Ontario, Canada's most populous province and its main economic engine, is in a recession right now because of the slump in manufacturing caused by a high Canadian dollar and weak U.S. demand.
"When you have a recession, you can't anticipate good stock market action," he said.
The S&P/TSX composite index closed down 34.78 points, or 0.25 percent, at 13,709.10 on Friday, down more than 2 percent in a highly volatile week.
With the possibility of the bear coming over the mountain, it is inevitable that investors will feel some pain, but there are things they can do besides just playing dead, said Peter Chandler, senior vice-president at Canaccord Capital.
Chandler says that, right now, he likes stocks in energy, agriculture, base metals, and even precious metals, which are being used to discount inflation.
"For gold to go, on an inflation adjusted basis, to where it was in 1980, today it would have to be trading somewhere north of $2,000 and it's not there yet," he said.
Investors should also diversify their portfolios, taking a look at how much risk tolerance they can afford, and making sure they have a good mix of assets, like equities, fixed income and cash, said Adrian Mastracci, portfolio manager and president at KCM Wealth Management.
"We've had a bull market for a good five and a half, six years and, even after the rout that we've had in Toronto, most people should probably still be reasonable up, unless they bought recently," he said.
He recommends people prune some of the riskier bets from their portfolios, adding that he thinks financials will likely see more red ink.
Above all, he says, avoid knee-jerk reactions.
"One day, the sun will shine again. I don't think it's going to be in the next month or two, but the sun will shine."
Editing by Rob Wilson