Getting A Buy List Together

Despite the dread that October conjures up in the minds of investors, more bear markets have ended in October than have begun in that storied month.

That axiom didn’t work last year, obviously, but maybe it will work a little better this year. At a minimum, a 4-6 week rally is likely at some point. But another leg down in the market before then appears to be a good possibility, particularly if the index charts don’t start to look better. At a minimum, the lows need to be retested, and at the maximum, the Dow could have another 2,000-point down move in it.

Key dates to watch are today-tomorrow, a potentially powerful cycle turn window, and October 11-12 and October 21-23. A strong sell-off into those turns could produce a good rally. Longer-term, November 11 could be an important date, and mid-December to early January is a very important window that we’ll worry about at a later date.

For now, it’s time to have a plan. After turning cautious on the market in mid-June and bearish in early August, the strong down trends that we identified could be close to at least temporary exhaustion.

A few caveats are in order. First, it’s hard to imagine a major bottom occurring with so many unknowns and the economy still falling sharply, so caution is advised. Second, if September 21-24 marked a major turn in the market, it was the least impressive one in at least four decades, per internal market data compiled by John Roque. And third, we at least have to consider the possibility that this is a secular bear market that could go on for several years, perhaps just a long trading range. What worked in the past may not work in the future, and it will likely be tougher to make money than it was in 1995-1999.

With all that in mind, it’s time to put together a list of potential stocks for any rally. Here are a few stocks that are trading at or near the low end of their 10-year valuation range, per the valuation work of Ken Lee, author of Trouncing the Dow. Value has tended to outperform growth over the long history of the market, and an added measure of safety is never a bad idea.

Relatively undervalued companies here include Staples , Tyco , Sherwin-Williams , Alcoa , and Paychex . Others that are 10%-20% from their downside targets include Home Depot , Pfizer , Citigroup , General Electric and Bank of America . Boeing could be interesting if it wins any of the $200 billion Joint Strike Fighter contract set to be announced at the end of this month.

Not a bad group to look at if October produces a good buying opportunity.