Health Care and Utilities and Technology

As market correction plays out, good buys remain INVESTING Keenan Hauke:

April 18, 2005

It's week five of the correction that began in early March. Major market indexes have declined anywhere from 3 percent to 8 percent, and the selling may not be over.

Does it matter? Is this simply another minor setback on the march to new highs?

It definitely matters. As I've said since January, the bull market that began in March 2003 has now changed so that you can't depend on the broad rising tide to bail you out. Micro-cap-size companies have most likely topped out. Some technology areas have topped and it looks like tech in general is going to need a triple bypass soon to bring it back to life. Banks and brokerage stocks should underperform until the rest of the market tops. Yes, there are distinct changes going on that command your attention.

I bring good news, though. Despite high levels of bearishness today, most of the major indexes should see new highs within a few months. The Dow Jones utility index hit a new all-time high last week. The Dow Jones industrials and the Standard & Poor's 500 should see new highs soon, along with the mid-caps and most foreign markets. That might not be so for micro caps and technology, but investors have solid opportunities in front of them.

Micro-cap stocks have topped and this is beginning to show up in the recent results of the Russell 2000 index. The Russell is an index of 200 small-cap stocks, primarily NASDAQ issues. The Russell has underperformed all year. The advance/decline line for the NASDAQ market began falling a year ago and it is mostly due to the high number of very small stocks that are suffering. The Russell will make a good short on any market rallies.

The small-cap indexes will be the next to go. Small-cap stocks probably need a few more months before they really throw in the towel. But this action is typical of market cycles. As bull markets become more mature, large investors seek the safety of more liquidity, which means buying larger companies. I call it swimming upstream.

This swimming will continue until the final days of this bull market, so it is only a matter of time before my beloved mid-caps start to fall apart. That's months away, still, and I will talk more about the breakdown as we get closer to its actually happening.

Last week regarding the energy sector, I reported that I didn't know when I would buy the stocks again. Now I know: If they fall only a little bit more than they have already. Short term, I was dead on. But I risk missing the bigger move. Energy stocks are the new Internet stocks. Companies like Valero Energy Corp. are going to become more volatile, but the ultimate top could be many points from here.

Sectors that should really lead the market when the next rally kicks off are going to be the same stuff that has been working the past 12 months. Utilities, energy, basic materials, consumer staples and health care. These sectors are experiencing a normal correction. This sell-off should stall out in the next few weeks, then a return to new highs should be in the cards. But be wary of stocks that have suffered more than the averages during the correction.



Hauke is a local money manager. His column appears weekly. Views expressed here are the writer's. Hauke can be reached at 566-2162 or at keenan@samexcapital.com.
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