Is this the correction that any investor with cash on the sidelines has been waiting for? If so, how do we decide what to buy and when to buy it?

I think the answer to the first of those questions is, not yet. We're in the early stages of something that could be just a dip but looks like a much sharper move downward. The trouble is, there's so much air under some of the stocks that moved up most, it's hard to figure out where a correction might end once it builds momentum.

If the answer to the first question really is "not yet," the best way to develop and execute a buy list is to divide your stock wish list into sections, each with its own market conditions that would trigger a buy. So after climbing out on a limb to give you my take on where the market is headed, I'll begin sawing it off by giving you my list of 10 stocks I'm looking to buy and the market conditions that would trigger those purchases.

To know where stocks stand now, break down the market into at least three segments.

Tech Stocks Have the Most to Give Up

First, 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.

Many corrections follow a pattern of taking back 38% or 50% of the gain from the prior rally. A common pattern, you could say, is for the market to move up three feet, then give back one.

That would make this current pullback a typical and orderly correction after a huge rally. A drop all the way back to 1809 would be a 16% correction from the Jan. 26 high.

And the March 16 close of 1944 would mark just about the halfway point in that decline, with the Nasdaq looking at another 7% drop.

Unfortunately, however, the technology rally that began in March 2003 was so fast and so steep that there's a chance that any decline will shoot right through that support.

You can see the problem if you look at specific tech stocks. Intel ( INTC) fell to $27.70 on March 8. That was below its major technical support at the 200-day moving average. Now it's hard to find a price where the stock spent any amount of time building a base above $20, a price the stock last saw in June 2003.

The Nasdaq could easily wind up retracing 50% of the rally since March 2003, which would put it near 1647, down about 24% from its January high.

Basic Materials Not as Vulnerable

Second, 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 Strengths

Last, 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%.

Looking at the charts of some S&P stocks, there's a good chance the damage will be less than 14%. It's possible it will bottom at 1050.

That's because the big consumer stocks with solid and predictable earnings that have led the S&P 500 for much of 2004 are showing relative strength compared with stocks in the Nasdaq and Dow. Some consumer stocks such as Avon Products ( AVP) and Hershey ( HSY) have even moved up during this market retreat.

All of this leads me to a way to divide my buy list into three sections and to plan how to execute those buys if this correction continues to develop as I've sketched out.

The Buy-List Breakdown

Consumer 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
Close
Sector Target Buying Price
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
Intel (INTC:Nasdaq) Semiconductors 27.16 Technology 26.51
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.
At the time of publication, Jim Jubak owned or controlled shares in the following equities mentioned in this column: Berkshire Hathaway and PepsiCo. He does not own short positions in any stock mentioned in this column. Email Jubak at jjmail@microsoft.com.

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