"New leadership often emerging during corrections," says Richard Moroney in Dow Theory Forecasts, who highlights 6 relative strength blue chips.
The advisor explains, "Stocks have retreated sharply and broadly, reflecting concerns that turmoil in the corporate-junk-bond and mortgage-debt markets will spill over to the broader economy – and perhaps halt the boom in takeovers."
Near-term volatility seems likely, he suggests, and a pullback to 12,700 to 13,350 on the Dow Industrials would be consistent with a secondary correction in an ongoing bull market. While holding some cash on the sidelines seems prudent, he advises, his recommended cash position remains at 5% to 10%.
Looking to find the stocks that will qualify as "new leadership" for after this correction, he notes, "A stock's ability to outperform during such pullbacks is a bullish indicator."
What qualifies? Moroney points to General Dynamics (NYSE: GD); Hewlett-Packard (NYSE: HPQ); IBM (NYSE: IBM); Lockheed Martin (NYSE: LMT); Oceaneering International (NYSE: OII); and PepsiCo (NYSE: PEP). He says, "All six are blue chips, all are members of our Buy List, and are all displaying above-average relative strength."
He adds, "Consensus current-year profit estimates for all six have risen over the past month, and all six earn above-average Quadrix® scores for both Earnings Estimates and Performance. All six earn Quadrix Overall scores above 85, placing them in the top 15% of U.S. stocks."
Each day, Steven Halpern's TheStockAdvisors.com features the latest investment ideas and market commentary from the financial newsletter community.
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