Play It Safe With These Defensive Picks

NEW YORK ( TheStreet) -- Just like government shutdowns, bubbles are not a new phenomenon. Nor do bubbles inflate without letting some "air" out from time to time.

The last U.S. government shutdown was from November 1995 through January 1996. President Bill Clinton and the Congressional majority couldn't agree on a resolution until a compromise prevailed.

The S&P 500 fell almost 4%. It was no fun but it didn't burst the market's bubble. A month after the situation was resolved the S&P was up almost 11%.

That transpired when that bull market was nearly seven years old and it had plenty of running room after the crisis was over. At the moment we're four and a half years into this bull market, and wait till you see how high this one goes.

At the moment there's plenty of fear and trepidation. On Monday what some people call "the fear index" (a.k.a. The VIX) ended up for the day by almost 16%, closing at the high of 19.41. The VIX doesn't have far to go till it reaches the 52-week high of 22.72 reached on Dec. 31, 2012.

So if you're a little perturbed by the headlines and the ruckus over government gridlock and the looming draconian debt-ceiling dilemma, you're not alone. But the Federal Reserve has our backs, so see this well-needed market correction as a chance to "stock up" on defensive, dividend-paying companies.

Before making a couple of suggestions, let's look at what happened to the broader S&P 500 stock index after the VIX topped out at the end of 2012. Here's a one-year picture that paints a thousand words using the SPDR S&P 500 ETF ( SPY). SPY Chart SPY data by YCharts

All the factors that caused these amazing first two legs of this bull market are still in place. The final two legs are most likely to surprise to the upside in big ways.

Bargain Stocks and Bargain Sectors

If a stock or a sector is a classic bargain after the Fed's extraordinary monetary policies and bond-buying spree, something is probably wrong.

Take the precious metal subsector of the broader materials sector. After a large correction in the price of precious metals, the miners have been hit hard and are still selling near 52-week lows.

Bargains that are "defensive" in nature are harder to find even after all the D.C. drama.

For example Danaher ( DHR) a science and technology manufacturer.

Danaher has a lot of ways to make money. From its Test and Measurements division that provides electronic measurement instruments to its Environmental segment which offers instrumentation and disinfection systems, this industrial giant should be flush with cash.

Yet even with trailing twelve month revenue of more than $18.5 billion it offers a miniscule dividend while it sits on total cash of more than $2.34 billion as of June 28. It steps into the earnings confessional on Oct. 17 and analysts estimate revenue will have increased 4.5% and EPS growth may be close to 8%.

With a profit margin of 13.4% and operating margin of nearly 18% investors are willing to tolerate a trailing price-to-earnings ratio of over 19 and a forward (one-year) P/E of nearly 18. Looking at DHR's price-to-earnings-to growth ratio (five-year expected) of 1.77 and you might surmise better earnings growth is on its way.

Here's a one-year chart that serves to remind us that Danaher is slowly sliding towards the bargain bin. But don't expect it to go much lower than the Aug. 29 low of $64.78 with the current TTM revenue and EBIDTA earnings momentum. DHR Chart DHR data by YCharts

For speculative investors who expect gold to end the year higher consider Newmont Mining ( NEM) which so far has paid more than a 3% dividend and trades very close to its 52-week lows.

A more diversified way to buy a basket of the best industrial companies including Danaher is to scale into shares of the Industrial Select Sector SPDR ETF ( XLI).

The ETF hasn't traded below $45 ashare since Sept. 6 when its intraday low price was $44.45. Consider buying half an allotment on the next day the ETF dips to $45.60 and then see if you can bottom fish for the other half waiting for the debt-ceiling showdown to frighten the price all the way to $44.

Two Resolutions for Bargain Hunters during a Bubble Market

  1. I will develop the discipline to buy on the dips and to average down. Jim Cramer likes to call that "scaling into a position" and during a short-term market correction the conditions are ripe.
  2. I won't waste money with high frequency trading nor will I try to time the market. A market in motion tends to remain in the dominate direction of that motion even during a seasonal respite.

I'll leave you with another "defensive" sector for times like these. The financial sector, which includes insurance companies and the big banks, is the No. 1 direct beneficiary of the Fed's ongoing largesse.

The Financial Select Sector SPDR ETF ( XLF), with its top two holdings of Berkshire Hathaway Class B ( BRK-B) and Wells Fargo ( WFC) equaling almost 17% of the weight of this popular ETF may look like a bargain six months from now if purchased below $20.

So don't be a scaredy-cat or a bubble-head. Be disciplined, think defensively, and buy when the market is temporarily swooning. When happier days arrive you'll be glad and ahead of the herd. Disclosure:.

At the time of publication the author is long shares of NEM but is neither long nor short any other companies or ETFs mentioned in this article.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
Marc Courtenay is the founder and owner of Advanced Investor Technologies, LLC, as well as the publisher and editor of

Courtenay holds a Master's of Science degree in Psychology from California Polytechnic State University, and is a former senior vice-president of Investments for two major brokerage firms. He's been a fiercely independent investment "investigator" and a consulting contributor to the investment publishing world for over 30 years. In addition to his role as an investment publisher and analyst, he serves as a marketing consultant to the investment media industries.

In his role as a financial editor, he specializes in unique investment strategies, overlooked stock investments, energy and resource companies, precious metals, emerging growth companies, the prudent use of option strategies,real estate related opportunities,wealth preservation, money-saving offers, risk management, tax issues, as well as "the psychology of investing". Because of his training and background in Clinical Counseling and Psychology, he enjoys writing about investor behavior, the ¿herd mentality, how to turn investment mistakes into investment breakthroughs and the stock market's behavioral trends and patterns.

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