Bullish Primary Trend Reconfirmed

7/29/2013


The Dow Transports closed above their previous high of 6,549.16, confirming recent new highs in the Dow Industrials. The move to all-time highs in both averages reconfirms the market's bullish primary trend, according to the Dow Theory.

Confirmation is central to the Dow Theory, as the movement of one average must be confirmed by the other for a valid signal. New highs in both averages suggest the economy is advancing broadly — and increase the likelihood that a market rally has staying power. 

The Dow Theory's bullish confirmation seems especially significant given increasing concern about global economic activity. So far, second-quarter corporate profits have done little to lessen those concerns.

According to Zacks, results from the first 130 S&P 500 companies to report show total earnings up 6.7%, with 61% of companies beating expectations. Revenue growth is a more modest 3.8%, with 42% of companies beating top-line expectations. Revenue and earnings growth and the revenue beat are consistent with numbers from a similar point in the first quarter, although the percentage of companies topping profit targets is tracking lower.

The financial sector has juiced aggregate numbers, with total earnings up more than 34% on 10% higher revenues. Strip out finance, and index earnings growth flips negative, down 3%. 

However, investors should remember that stock markets are forward looking. Thus, new highs in the economically sensitive Dow Transports bode well for future economic activity and corporate profits.

Conclusion

The recent bull-market reconfirmation does not eliminate the possibility of periodic secondary pullbacks. Still, with the Dow Theory squarely in the bullish camp and quality growers available at reasonable valuations, we are inclined to view pullbacks as buying opportunities. Our buy lists have 92% to 99% in stocks. For new buying, Cognizant Technology ($72; CTSH) and Wells Fargo ($45; WFC) are top picks


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