Market Digests Earnings

8/4/2014


The stock market has been trending sideways since the beginning of corporate earnings season, as investors weigh what up to this point has been a decent showing on the corporate profit front versus stock valuations that appear a bit stretched in some sectors. While it would not be surprising for the stock market to continue its sideways action in the near term, the primary trend remains bullish. For now, our buy lists have 94% to 97% in stocks.

Time for a breather

Since the unofficial start of the corporate earnings season on July 8, the Dow Jones Industrial Average and S&P 500 Index have been little changed.

The muted price action comes despite corporate profits that have been, for the most part, pretty solid. According to Thomson Reuters, the percentage of companies beating on revenue and profits is running above historical averages.

One sign of a tired stock market is the failure of stocks to respond to seemingly good corporate profit news, so the recent price action bears watching as the flow of earnings announcements continues in coming weeks. The current sideways trading action could turn into something more significant on the downside if the recent trend of better-than-expected sales and profits reverses and the upcoming barrage of important economic data disappoints.

The S&P 500 Index has gone more than five months without a 5% correction and more than two years without a 10% pullback. Do not make the mistake of ignoring the possibility of a more meaningful pullback.

During periods when the market faces a lot of crosscurrents — such as corporate profits, overseas turmoil, a slew of economic reports, and ongoing political and judicial firestorms — the Forecasts likes to take a step back and focus on the primary trend. And we have good news: That primary trend is unequivocally bullish, according to the Dow Theory.

While a bullish Dow Theory does not negate the possibility of market corrections, it does help frame those corrections as pullbacks within bull markets. For that reason, investors should avoid aggressive selling into declines, but rather use weakness as an opportunity to upgrade portfolios.

Conclusion

With the Dow Theory bullish and good growers still available at reasonable valuations, investors should maintain a constructive stance toward stocks. Two excellent upgrade candidates are Focus List Buys Dow Chemical ($53; DOW) and Kroger ($50; KR).


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