Tech Stocks Have the Most to Give UpFirst, there's the tech-heavy Nasdaq Composite, which through March 16 was down 9.7% from Jan. 26. The Nasdaq climbed farthest and fastest in 2003, up 49.1% for the year, and it now has the farthest to fall to find solid footing. In its decline so far, the Nasdaq fell through major technical support at 2000, 1980 and 1970. But the charts show a distinct possibility that this correction won't stop until it hits either of these two levels:
- The bottom of the October-December trading range at 1880. That's a strong level of support because the 200-day moving average sits nearby at 1876.
The even more important technical level at 1809. This would represent a 38% retracement for the March 2003-January 2004 rally.
Basic Materials Not as VulnerableSecond, there's the Dow Jones Industrial Average, with its big dose of basic materials stocks, such as Alcoa ( AA). As of March 16, the Dow was down 5.1% from its 52-week high on Feb. 11. That's about half the drop of the Nasdaq from its peak. The Dow looks to have solid support first at 9760, the 200-day moving average. That level is another 5% lower than the March 11 close. The Dow has second support at 9500, and finally an extremely strong base at 9000. The 9000 level would represent another 11% from here, and a total drop from the Feb. 11 high of 16%. I think that's the worst case for the Dow in this correction. If you look at the charts of individual Dow stocks, you can see what makes this part of the market different from the technology sector. Alcoa is still well above support at the 200-day moving average of $30.78, and the stock then has additional strong support at $28 and $25. According to technical analysis, this stock won't go into free-fall as some technology stocks threaten to do with this much strong support at so many levels within reasonable distance of this price. It looks like the basic materials and cyclical stocks that led the Dow Jones Industrial Average upward in this rally and that performed so strongly in 2003 are likely to fall only two-thirds as far -- a 16% decline vs. a 24% retreat -- as the stocks in the technology sector.
Consumer Stocks Have Hidden StrengthsLast, there's the S&P 500, which at the March 16 close was down 4.1% from its Feb. 12 high of 1158. The momentum on the S&P 500 is to the downside, just as it is with the other major indexes. But it shows very strong technical support not too far below current levels at 1050 (the 200-day-moving average) and at 1000. So the S&P 500 has a good chance of seeing its retreat limited to a further 5% to 10% decline from the March 16 close. If the index fell to 1000, the total drop from the Feb. 11 high would be about 14%.
The Buy-List BreakdownConsumer stocks. I'd like to add these to my portfolio for a quick bounce from the stimulus of springtime tax cuts and tax refunds and for longer-term gains as a result of solid earnings growth. Because of those earnings, these stocks probably won't fall more than 10% to 15% from their recent highs. I might buy shares of shoemaker Wolverine World Wide ( WWW). I like the $22 level on the stock, which is about 10% below the stock's March 9 high and close to support at the 50-day moving average. I'd take a similar approach to other consumer growth stocks I'd like to add to Jubak's Picks, such as carpet and tile maker Mohawk Industries ( MHK). A good price for Mohawk would be about $76. I put two stocks I already own in Jubak's Picks -- PepsiCo ( PEP) and Berkshire Hathaway ( BRK.B) -- in this category, too. I'd add to my positions in those shares (or begin new ones) on a 10% pullback from recent highs. That would be about $47.50 for PepsiCo and $2,880 for Berkshire Hathaway. Basic materials stocks. I'd like to add some of these to my portfolio, because I believe in continuing inflation for industrial commodities, thanks to strong growth in places like China and India. But with these stocks, I'd look for a decline of at least 15% before putting my toe in the water. I'd divide the names that draw my interest into two groups. In one, I'd put stocks like Inco ( N) and Carbo Ceramics ( CRR). I sold them in Jubak's Picks when they got too pricey for me, but I'd love to buy them again. A 15% drop from the recent February high would put Inco at $32.90 and Carbo Ceramics at $55.70. The second group consists of stocks I missed on their way up. In this group I'd put Brazilian iron producer and exporter Companhia Vale do Rio Doce ( RIO) and graphite manufacturer GrafTech International ( GTI). I'd be looking for Companhia Vale do Rio Doce below $51.85 (it closed March 16 at $51.40) and GrafTech near $12.35. Technology issues. Little in the technology sector has dropped far enough for a potential gain to offset the considerable potential downside if this correction gets out of hand. To make up for that uncertainty in this group, it would take a 25% drop from recent highs before I'd become interested. Even then, I'd be selective. Two stocks I'm watching are Intel and Analog Devices ( ADI). For Intel, the price I'm watching is $25.61; for Analog Devices, it's $38.50.
|The 10 to Watch |
Jubak's potential buys in this market correction
|Company||Business||March 16 |
|Wolverine (WWW:NYSE)||Shoes and boots||$22.53||Consumer||$22|
|Mohawk Industries (MHK:NYSE)||Carpets, ceramic flooring||81.48||Consumer||76|
|PepsiCo (PEP:NYSE)||Beverages, food||51.20||Consumer||47.50|
|Berkshire Hathaway B (BRK.B:NYSE)||Insurance, financial, home building||3,058.00||Consumer||2,880|
|Inco (N:NYSE)||Nickel, metals||33.70||Basic materials||32.90|
|Carbo Ceramics (CRR:NYSE)||Oil and gas drilling materials||62.40||Basic materials||55.50|
|Companhia Vale do Rio Doce (RIO:NYSE)||Iron and steel||51.40||Basic materials||51.85|
|GrafTech International (GTI:NYSE)||Graphite products||13.08||Basic materials||12.35|
|Analog Devices (ADI:NYSE)||Analog and digital signaling processors||46.20||Technology||38.50|
|Source: MSN Money|
Keep in mind that these are all just tentative buy targets based on market conditions on March 16. If this retreat starts looking more serious than a standard 15% correction, I'll revise these targets downward. Similarly, if the retreat stalls and the market reverses more quickly than I expect, I'll revise the targets in the other direction and try to pick up a bargain or two, even at a less-than-expected discount. In short, know what you want to buy in this very fluid market, and prepare to take whatever opportunities the market gives you.