equity marketThe equity market is looking pretty tired these days and many professional investors seemingly don’t have a sense as to where share prices will go in the near term.

Valuations have been extreme at many fast-growing companies, but this isn’t unusual. The fastest-growing companies are often overbought by institutional investors who can afford to trade on momentum. Closer to quarter-end, much of the action actually is just window dressing.

The vast majority of brand-name stocks are due for a meaningful correction. That would be a healthy development for an equity market that’s up around 25% year-to-date.

I think investors need to be highly cautious and very conservative with their holdings. Dividend-paying blue chips are my favorites going into 2014 because they have the cash, the healthy balance sheets, and the pricing power to keep earnings elevated, even if the U.S. economy experiences its next recession (which is a very plausible development next year).

I recently wrote about The Walt Disney Company (DIS), which has been reporting great earnings results all year. The company just announced a 15% increase to its annual dividend.

Two weeks ago, NIKE, Inc. (NKE), another company that I like, announced a 14% increase in its quarterly dividends. The position just broke $80.00 a share, a record high. NIKE has pretty much doubled in value on the equity market over the last three years. (See “These Two Proven Wealth Creators Should Be at Top of Investors’ Wish Lists.”)

But investment risk is equally—if not more—important than expected returns, and this equity market is overbought. It’s hard to imagine stocks not experiencing a profound sell-off, even when based on technical factors alone.

With the equity market at an all-time high, finding attractive new stocks to buy is increasingly difficult. And psychologically, it’s also difficult to make new investments when it’s so clear that stocks should experience a major price retrenchment.

I definitely don’t advise investors to chase positions—this is a major investor mistake. The outlook for monetary policy looks pretty stable near-term, but even though the equity market expects the Federal Reserve to begin tapering its bond buying, I sense that big investors are looking for a reason to sell.

There have been price consolidations recently but no full-blown correction, which is what I think this market really needs.

Given current information, a meaningful correction would be a buying opportunity, but only in what I consider the most attractive stocks from a risk-to-reward perspective. These stocks are dividend-paying blue chips.

This year, the Fed-induced speculative fervor has been strong enough to support several years of historically good equity market returns. There is still some momentum left in this market, but prices are long in the tooth.

When it comes to an investment strategy, a portfolio of dividend-paying blue chips remains a hold. But generally speaking, I wouldn’t be buying much at this time with the expectation of a major equity market correction early next year, especially when a major price retrenchment could be a profitable buying opportunity.