Sir Stuart Rose must feel as if he were living a nightmare. Marks & Spencer shares are trading at two-year lows, like-for-like sales are heading south and gossip has it that Sir Philip Green, his old sparring partner, is stalking the business again.

The Bhs billionaire was quick to laugh off rumours that he had been buying shares in M&S - “I didn't buy any when I wanted the business, why would I now?” - but it's a sign of the times.

Some of the high street's biggest names have taken such a tumble on the stock market that activist investors are said to be scrutinising potential bargains for the first time in months.

Remember last May 11? Tony Blair had just abdicated, a Scottish businessman was offering £1million to help to find Madeleine McCann and Lewis Hamilton had yet to win a grand prix.

It was also the day that the high street digested another interest-rate rise and retail share prices went into freefall. The FTSE 350 general retailers' index is now trading 41 per cent below the opening level of that spring morning.

A bloodletting over the intervening months has seen DSG International plunge 57 per cent, Sports Direct 56 per cent and Debenhams 53 per cent. M&S is off 45 per cent in a collapse that has wiped more than £5.5billion from its market value.

Further evidence of the poor health of the high street came yesterday as National Statistics showed that sales volumes at department stores fell by the largest amount in December for 13 years, despite widespread price cuts.

Executives acknowledge that it has not got any better in January. Footfall figures this week showed that the number of shoppers the high street is down on a year ago.

Terry Duddy, the chief executive of Home Retail Group, admitted that sales would be “harder to come by” throughout 2008, and Simon Wolfson, the chief executive of Next, expected negative like-for-like sales all year.

However, events on the other side of the Atlantic provide a glimpse of what some in the City believe could spark a rally here. Kellwood is a St Louis-based clothing and camping equipment company that owns brands such as Baby Phat and Sag Harbor and produces clothing under licence for Calvin Klein.

It is fighting off a hostile takeover approach from Sun Capital, the private equity firm and minority shareholder, after seeing its shares fall more than 40 per cent in the past year.

One senior banker said this week that hedge funds and activist investors were already scouring potential targets in the UK, given that retailers were trading at their cheapest price-to-earnings multiples for years.

He said that although takeovers were unlikely at this point, investors may decide to copy the model used to such great effect by Baugur, the Icelandic investment house, and take stakes of about 10 per cent and seek to turn a profit or wait for capital markets to improve to allow a debt-funded acquisition.

Another mooted the logic of big mergers, giving the example of a J Sainsbury-Home Retail tie-up, given the huge non-food exposure the supermarket would gain at the drop of a hat.

Already there are signs that some of this speculation is feeding through to the stock market.

Société Générale said yesterday that, although the FTSE 350 general retailers index stood far below last year's peak, it outperformed the rest of the market this week.

Signet, the jewellery group that issued two profit warnings over the festive period, rallied 17 per cent from its recent lows. Kesa gained 10 per cent after defying the doom-mongers and reporting positive like-for-like growth at Comet and keeping profit forecasts intact.

Whether the gains can be sustained is less clear, particularly given the poor economic environment highlighted by yesterday's retail sales data.

Howard Archer, the chief economist of Global Insight, said: “Consumer spending is now increasingly faltering in the face of mounting headwinds.”

Citigroup believes that some retailers have further to fall, most notably Woolworths. Trevor Bish-Jones, the Woolworths chief executive, forecast this week that the retailer's high street stores would move back into the black despite a sharp fall in Christmas sales.

Clearly, Citigroup did not buy the optimism and savaged the retailer yet again on Thursday. Only a month after saying the stores were worthless, the bank cut its target price on the stock to 5p.

Bruce Hubbard, the retail analyst, said that Woolworths' move into multichannel, through the Big Red Book, had failed, and the break-even performance of the stores reflected only changed accounting policies.

He said: “Woolworths demonstrated once again how the brand is retreating up the beach in the face of an ever-rising tide of competition.”

Investec rained on Kesa's parade yesterday by cutting its target price from 210p to 180p and pointing out that the slowdown was spreading to its French chains, BUT and Darty.

Bulls could have another cause to shout this week as the Christmas reporting season comes to a close with what are likely to be the high street's two biggest winners over the festive period, the Wm Morrison supermarket chain and Asos, the internet-only fashion store.

On Tuesday Morrisons is expected report like-for-like growth of more than 8 per cent for Christmas, more than double the rate of growth at Sainsbury's and Tesco.

However, analysts are telling investors to wait. Tony Shiret, the veteran retail analyst at Credit Suisse, predicted before Christmas that retail share prices would drift until at least the middle of 2008. He was sticking to this forecast yesterday and called the minor recovery in some stocks this week a typical “dead-cat bounce”.

He said: “There's a natural inclination once things have gone down a long way to expect a bounce, but I think people could be getting sucked in too early.”

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