Two Picks for When the Bull Resumes

02/04/2010 1:00 pm EST


Dan Sullivan

Editor, The Chartist

Dan Sullivan, editor of The Chartist, says the market is going through an overdue correction, and the rally should start again soon.

Even though several high-profile analysts are screaming doom and gloom, the fact remains that by definition we are in a bull market, which, if the past is any criteria, has further to run.

In bull markets, corrections come with the territory, and, indeed, stocks came under heaving selling pressure on expanding volume on January 20th, 21st, and 22nd. The Dow Jones Industrial Average dropped 552 points, -5.15%; the Standard & Poor’s 500 lost 5.08%; the Nasdaq [Composite index] -4.96%, and Russell 2000 -4.93%.

It is a very rare event for the S&P 500 to record a 52-week high, which it did on January 19th, and then to drop in excess of 1% in each of the next three trading sessions. The last time it happened was October 1979. Three months later, it had regained all of the lost ground and was back in record high territory.

The Dow, S&P 500, Nasdaq Composite, [and] the Russell 2000 have dropped below their respective 50-day moving averages; however, all four of these key indices are comfortably above their up trending 200-day moving averages.

Currently the market is approaching oversold territory. During the previous bull market, which began in October 2002 and ended October 2007, stocks were oversold close to a dozen times, and on each and every occasion the market went on to record the new highs.

It is a nervous market, with the latest from Investors Intelligence showing the number of bulls dropping from 52.2% to a current reading of 40.0%, which ranks as one of the largest reversals in some time. It is also the lowest percentage of bulls since last July. The percentage of investment newsletters looking for a correction jumped all the way up to 36.7%, the highest in over ten years.

Putting it all together, a rally is overdue, but we anticipate more of a shake-out before this market turns around. Our long-term models are bullish.

Bucyrus International (Nasdaq: BUCY) engages in the design and manufacturing of mining equipment used for extracting coal, copper, iron ore, and other minerals. The company also supplies replacement parts and services its original equipment. The company sells its equipment in the US and internationally.

Analysts expect the company to earn $3.55 per share in 2010, up from $2.90 for 2009. For 2011, the company is projected to earn $4.30 per share. (The stock closed above $55 Tuesday—Editor.)

Capital One Financial (NYSE: COF) provides financial products and services to consumers, small businesses, and commercial clients in the US. The company offers consumer and commercial loans, brokerage services, investment banking, insurance, home loans, vehicle loans, and consumer credit and debit card products.

On January 21st, the company posted earnings above Wall Street forecasts. Fourth-quarter income was $376 million, or 83 cents per share, up from a $1.4-billion loss a year earlier. (It closed above $36.50 Tuesday—Editor.)

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