INVESTING: Better times lie ahead for embattled investors

The last full week of July turned out to be exciting for the stock market. Not long after the Dow Jones industrial average topped 14,000, a solid correction came flying in. The speed and power of the pullback deserve some respect, but so does the tenet of perspective.

If it wasn’t already, it now is probably apparent why I have been harping all year that you should concentrate investments in energy, industrials, materials and select technology.

The market suffered through a solid sell-off, leaving the S&P 500 up only 4 percent for the year. But even after the correction, the average gain for the above sectors is still 13 percent. The downturn did not change my opinion about where to look for gains. These sectors should continue to attract investor interest for the rest of 2007.

The low-risk approach to the market for the next few months is to accept the strong possibility that the correction is not yet complete. So far, the S&P 500 is down about 6.5 percent from the all-time high it hit a few weeks ago. I sense that we are in the middle of the first 10-percent pullback in the average since early 2003.

That leaves a little more work on the downside, but it also sets up the potential that most of the damage already has been done. There is an indicator I mention from time to time that measures the percentage of stocks above a 10-day moving average. Quite often, when this indicator moves below 10 percent (meaning at least 90 percent of all stocks on the exchange are trading below their average price over the last 10 days), the market is higher 30 days and 90 days later. This is one of the indicators I relied on to keep me in the market in March, after it hit 8.5 percent. The reading from July 27 is 4.4 percent. That is one of the lowest readings over the last 19 years, and it means a low might be approaching.

I like to look at other indicators with longer-term horizons to help keep me balanced for the intermediate term. There are similar tools that use 10- and 30-week instead of day averages. When all three reach oversold simultaneously, a powerful move to the upside is typically forthcoming. Currently, the 10-week and 30-week averages are approaching oversold territory, but are not quite there. Another four to six weeks of consolidation/correction should do the trick, though. The ferocity of the recent decline leads me to believe these indicators also will reach oversold before the market turns higher again.

I don’t believe the highs for 2007 are in yet, which is why I am looking for a buy point soon. This year reminds me a lot of 1997. That year, the market suffered through a 9-percent correction, a 5.5-percent consolidation and a whopping 13-percent correction before ending the year up 33 percent! Who said you will need a trip to the amusement park to get your thrills this summer?

The facts point to a rebound rally beginning sometime in the next four to six weeks (not just an oversold bounce, as is happening right now). The quality of that rally will go a long way toward determining my next step. For now, though, whenever that rally kicks off, I expect to see at least marginal new highs in the major indexes.