Listless Trading No Reason To Sell

6/30/2014


Amid low volatility and low trading volumes, the bull market grinds on. While more volatile trading is likely as earnings-reporting season approaches, a nearly fully invested posture remains appropriate. The primary trend is squarely in the bullish camp under the Dow Theory, and we are still finding high-quality growers trading at reasonable valuations. Our buy lists have 96.3% to 99.6% in stocks.

Running on empty?

The S&P 500 Index has not had a daily move of more than 1% since mid-April, the longest such streak since 1995. The S&P 500 has not suffered a 10% correction in 32 months, far longer than the average of 18 months between such pullbacks since 1945. Since April 1, average daily trading volume in S&P 500 stocks has been more than 20% below its five-year average.

Among S&P 500 sectors, the defensive utility and health-care sectors rank among the best year-to-date performers, while such early-cycle sectors as consumer discretionary and industrials rank among the worst. Meanwhile, in another sign of risk aversion, the large-company S&P 500 has handily outperformed the S&P SmallCap 600 Index.

For those of the bearish persuasion, the market's listless trading and the leadership of defensive sectors are symptomatic of a bull market running on fumes. Historically, investors have often migrated toward safe, noncyclical stocks in the late stages of a bull market, so the bears' argument merits attention. But, for several reasons, we think raising a big cash position is premature:

• First, a bull market can refuel many ways. A mere 5% to 10% pullback is often enough to rebuild the wall of worry that fuels stock-market advances. Without very adept timing, trying to trade ahead of such moves is very difficult.

• Second, while defensive sectors have rallied, more aggressive groups have held up relatively well. The economically sensitive Dow Transports reached all-time highs this month, as did the Morgan Stanley Cyclical Index. Even the homebuilder group, a key early-cycle industry that has slumped since early March, has shown signs of life since mid-May.

• Third, the broad market is showing decent strength. Advance-decline lines for the large-company S&P 500, midcap S&P 400, and broad S&P 1500 indexes reached all-time highs this month. The advance-decline for the small-company S&P 600 has rebounded within striking distance of its March high.

Conclusion

While trading is likely to become more volatile, and 5% to 10% pullbacks can occur with little or no warning, we are maintaining a nearly fully invested posture. Lear ($88; LEA) is a top pick.


Current Hotline

Stock Spotlight

Individual Stock Reports

ISRs make stock research easy!

Perhaps the most valuable two page reports available anywhere.

All the data you would normally have to plow through years of 10-K filings, earnings reports, and reams of market data to assemble — yours all in one concise report.

ISRs contain our proprietary Quadrix scores — find out how we rate all the stocks in the S&P 500.

Visit us at individualstockreports.com