Market Remains Resilient
The stock market continues to defy gravity, with both the Dow Jones Industrial and Transportation averages trading at all-time highs. With corporate earnings season soon coming to a close, investors' attention will likely move to other issues, including renewed budget and debt-ceiling battles in Washington and the "will-it-or-won't-it" Fed tapering drama. Given that stocks have not experienced anything more than a 6% correction this year, the possibility of a more protracted decline always exists. Still, with the market's primary trend bullish according to the Dow Theory, stocks could easily move higher in the near term.Â
One hallmark of the market's advance this year has been its reluctance to experience anything more than fairly modest corrections. Ironically, the fact that the market hasn't had a major correction is one reason a growing chorus of market watchers believes a correction is imminent.
All bull markets need corrections to clear away the speculative froth that builds during rallies. The Dow Theory quantifies corrections within bull markets as downward moves lasting three weeks to three months and retracing one-third to two-thirds of the previous advance.
However, markets can also trim speculative excesses via rotational corrections. Such corrections occur when investors rotate out of market-leading sectors into more reasonably valued sectors. Such rotational corrections remove froth but do not necessarily blossom into a significant decline in broad market indexes.
We have already seen some rotational corrections this year. For example, dividend-paying stocks, especially utility stocks, performed well in the first quarter of this year, only to slow down in the second and third quarters as fears over Fed tapering pinched income stocks and investors' risk appetites increased. In more recent trading, another rotational correction seems to be taking hold, with investors taking profits in some of the year's best performers while more economically sensitive stocks are performing better.
Of course, at some point the broad market will decline in earnest. The good news is that with the market's primary trend bullish, the Forecasts would view a pullback as a correction within a bull market, and thus a buying opportunity.
The fact that expectations for a significant correction in the market are so widespread may actually prevent one from occurring in the near term. With the primary trend bullish, our buy lists have 95% to 96% in stocks. For new buying, Comcast ($47; CMCSa) is an attractive total-return selection at current prices.