By James Langton
(October 10 – 18:00 ET) – Merrill Lynch’s chief U.S. Investment Strategist Christine Callies is advising NASDAQ investors to be on the defensive. “We continue to recommend that long-term investors start scaling into the secondary markets as NASDAQ prices dip below 3600.” She didn’t set an absolute bottom for the market.
In the early stages of a correction, she says, speculative stocks suffer first. As the correction progresses, blue chips get hit too. “This past week, some of the market’s favorite core holdings experienced fainting spells on pre-announcements,” she notes.
As this sort of correction plays out, she says, “negative themes are often concentrated in areas that have been key engines of the bull market. Technology and health care are often more heavily represented among the lagging segments, irrespective of whether the economy is healthy”.
But, once a turnaround is in evidence, all stocks start up abruptly, she says. “New leadership patterns are established quickly and do not alter much as the advance progresses. Major sector themes are established within the first three months and generally lead for at least six months.”
Merrill is observing a basic shift in the tech revolution away from pure new economy stocks to technically savvy old economy stocks. “We believe that U.S. investment themes are shifting in response to the evolution of the new economy, and that productivity from using technology will eventually improve returns in more mainstream businesses, shifting the focus of investor interest to the users of technology from the producers of technology.”
On the way back up she suggests over-weighting financial services, consumer, and health care stocks until the correction ends, shifting to more volatile shares in the technology, consumer cyclical, and medical technology.