Top Stocks for the Coming Correction

The stock market is getting soft quickly, but it’s to be expected. Even days when the main indices open positive, action turns down regularly; it’s a sign of things to come.  I wouldn’t be surprised if stocks stay soft until the fourth quarter. In an environment of mixed economic data and modest corporate earnings, that’s just something for which investors should be prepared.  Plenty of companies reported a solid first quarter and reiterated their outlooks for the year. But current action isn’t about corporate earnings or monetary policy. Stocks are in need of a break. A prolonged consolidation, if not a full-blown correction, is perfectly normal in the context of a secular bull market.  Leadership in technology stocks is breaking as evidenced by the performance of the NASDAQ Composite. It’s also evident in the Russell 2000 index of smaller-cap companies and the NASDAQ Biotechnology index.  For stocks to really rollover, the Dow Jones Transportation Average will have to retreat as well; so far, it’s still holding up due to the strong price action in airlines and most railway companies.  But while transportation stocks have consistently been at the forefront of market leadership, the whole group is due for a break as well.  I still see the best opportunities with large-caps and dividend paying stocks, especially, even though there’s not a lot of buying at this particular point in time. And this takes into consideration investment risk as well. Portfolio risk becomes much more important when stocks stop performing, and this is what I expect to happen over the next several months. (See “How Past Investment Trends Predicted This Stock Market Action.”)  Given current information, with a meaningful price retrenchment in the main stock market indices, it should be a buying opportunity.  Corporate balance sheets are mostly in excellent condition and the cost of capital remains low. Companies are still reticent to make major new investments, so the prospects for rising dividends going into 2015 are very good.  Since the beginning of this year, speculative fervor has come out of the biotechnology stocks and initial public offering (IPOs), which is a classic signal that the market is gearing up for a change in trend.  But it’s all normal in what was an exceptional year for stocks in 2013. The system, in a sense, is still trying to balance itself out after those exceptional capital gains.  Near-term, price consolidation in the main market indices is a good time to re-evaluate portfolios and to make lists of those stocks you might like to own if they were better priced.  Some of the stocks I like that would be worthy of consideration if there is an upcoming price consolidation/correction include: Johnson & Johnson (JNJ), 3M Company (MMM), Union Pacific Corporation (UNP), PepsiCo, Inc. (PEP), The Walt Disney Company (DIS), NIKE, Inc. (NKE), Kinder Morgan Energy Partners, L.P. (KMP), and Colgate-Palmolive Company (CL).  The investment theme remains blue chip, with economies of scale to boost earnings and excess cash to boost dividends.  Anything can happen in a stock market still under the influence of pronounced monetary stimulus. Potential near-term shocks to the system include geopolitical events, more currency troubles in Latin America, and/or another surprise in the banking system.  Corporate results and their outlooks are holding up. But a tired market for stocks is just that—tired. The prospects for capital gains near-term are diminishing significantly.The stock market is getting soft quickly, but it’s to be expected. Even days when the main indices open positive, action turns down regularly; it’s a sign of things to come.

I wouldn’t be surprised if stocks stay soft until the fourth quarter. In an environment of mixed economic data and modest corporate earnings, that’s just something for which investors should be prepared.

Plenty of companies reported a solid first quarter and reiterated their outlooks for the year. But current action isn’t about corporate earnings or monetary policy. Stocks are in need of a break. A prolonged consolidation, if not a full-blown correction, is perfectly normal in the context of a secular bull market.

Leadership in technology stocks is breaking as evidenced by the performance of the NASDAQ Composite. It’s also evident in the Russell 2000 index of smaller-cap companies and the NASDAQ Biotechnology index.

For stocks to really rollover, the Dow Jones Transportation Average will have to retreat as well; so far, it’s still holding up due to the strong price action in airlines and most railway companies.

But while transportation stocks have consistently been at the forefront of market leadership, the whole group is due for a break as well.

I still see the best opportunities with large-caps and dividend paying stocks, especially, even though there’s not a lot of buying at this particular point in time. And this takes into consideration investment risk as well. Portfolio risk becomes much more important when stocks stop performing, and this is what I expect to happen over the next several months. (See “How Past Investment Trends Predicted This Stock Market Action.”)

Given current information, with a meaningful price retrenchment in the main stock market indices, it should be a buying opportunity.

Corporate balance sheets are mostly in excellent condition and the cost of capital remains low. Companies are still reticent to make major new investments, so the prospects for rising dividends going into 2015 are very good.

Since the beginning of this year, speculative fervor has come out of the biotechnology stocks and initial public offerings (IPOs), which is a classic signal that the market is gearing up for a change in trend.

But it’s all normal in what was an exceptional year for stocks in 2013. The system, in a sense, is still trying to balance itself out after those exceptional capital gains.

Near-term, price consolidation in the main market indices is a good time to re-evaluate portfolios and to make lists of those stocks you might like to own if they were better priced.

Some of the stocks I like that would be worthy of consideration if there is an upcoming price consolidation/correction include: Johnson & Johnson (JNJ), 3M Company (MMM), Union Pacific Corporation (UNP), PepsiCo, Inc. (PEP), The Walt Disney Company (DIS), NIKE, Inc. (NKE), Kinder Morgan Energy Partners, L.P. (KMP), and Colgate-Palmolive Company (CL).

The investment theme remains blue chip, with economies of scale to boost earnings and excess cash to boost dividends.

Anything can happen in a stock market still under the influence of pronounced monetary stimulus. Potential near-term shocks to the system include geopolitical events, more currency troubles in Latin America, and/or another surprise in the banking system.

Corporate results and their outlooks are holding up. But a tired market for stocks is just that—tired. The prospects for capital gains near-term are diminishing significantly.