With stocks stalled after a huge rally, we could be looking at a correction of 10% or so, and it's good to be ready. Here are ten to watch and when to buy them, writes MoneyShow's Jim Jubak, also of Jubak's Picks.
Are we in for a correction? Could be.
And if you think we're headed for a replay of the late-March-through-early-June or early-September-through-mid-November pullbacks of 2012, what should you be doing about it?
Raising a little cash seems a reasonable idea, of course. Although since we're talking declines of 10% or less here (in my estimation), I don't think it makes sense to sell everything.
But you should also devote some "correction preparation" time into putting together a list of stocks you'd most like to buy if we do indeed get a reasonable correction. Because in the current state of the financial markets, not only are corrections relatively frequent events, they don't necessarily last very long. You need to be ready.
Remember, we're dealing with extraordinarily volatile markets here. The pullback from March 29 to June 4, 2012 quickly turned into a rally that took the S&P 500 up 14.8% before it peaked on September 14.
If you're dithering over what to buy on a sell-off, you could miss some of the best bargains. That's why for today's post, I've put together a list of ten stocks to buy on a correction.
Get Ready, Get Set
Technically, a correction is a drop of 10% or more. There's a good chance we're looking at something less dramatic than that—say, a 7% pullback. In fact, I've compiled the list not because I believe a correction is guaranteed, but because these days, I think it's smart to be prepared for volatility.
I've grouped the stocks in this list into rough categories that correspond to how deep any pullback might be. Some are better buys in a shallow retreat. Others won't become bargains unless the US market takes a sizable dive.
I think the news flow will have a significant say over whether we correct or not in the next month—and how big that correction might be—and predicting the news is never easy. So I want to be prepared for whichever way the wind blows.
US stocks have stalled—not in a big way, but stalled nonetheless. The S&P 500 peaked at 1,531 on February 19 and has moved slightly lower since, closing at 1,516 on February 22. And so have markets in Japan, China, and Europe.
Maybe this is all just the normal pause after a huge rally that has taken the indexes near all-time highs in the United States. But growth in the US economy is threatened by the effects of:
- first, the January tax increases that were part of the deal to avoid the fiscal cliff
- second, of the sequester set to wipe billions out of government spending at all levels starting March 1
Eurozone economies look to be either in recession (Spain) or headed that way (France). Japan and the United Kingdom seem about to embark on an additional experiment in central bank action—quantitative easing—that's a tribute to the depth of problems in those economies, rather than a vote of confidence in this monetary policy.
Could we have a correction here? Sure, although I certainly wouldn't say one is guaranteed. Central banks continue to flood the markets with cash—and since economic growth isn't vigorous in most of the developed world, a lot of that cash is headed not into investments in new plants and equipment, but into financial assets.
But in recent years, it hasn't been smart to overlook the possibility of a decent correction after any rally. Even in 2012, which was a good year for stocks—the S&P 500 delivered a total return of almost 16%—investors saw a drop of 6.2% from September 4 to the market bottom on November 13. Last spring, the S&P 500 fell 9% from March 29 to June 4. And my calendar tells me spring 2013 is the season up next.
With indexes in the US near five-year or all-time highs, I've turned cautious lately. I've thought it made sense not to sell everything—I don't know that we're guaranteed to see a correction soon—but to sell stocks that hit my target prices. So I sold Nestlé (NSRGY) on February 6 and Cummins (CMI) on February 11.
I might have sold more, but I ended 2012 with a little more than 29% in cash. With that kind of cash position, I didn't need to be too aggressive about raising more cash. (And if you think that kind of precision about the Jubak's Picks cash position is a sign that I've just about finished my calculations for the portfolio's performance through the end of the year, you're absolutely right. I'm just double-checking some numbers now, and I expect to post that performance report this week.)
The buying I've done under these circumstances has been either on a dip in the individual stock —Akamai Technologies (AKAM)—or on strong trends outside the United States, like buying Toyota Motor (TM) to play a weak Japanese yen.
And now what? I'm watching and waiting and researching.
NEXT: 10 Stocks in 4 Key Categories