Emerging-market currencies and stock markets have dropped on worries regarding the plunge in oil prices, the rising U.S. dollar, and the potential for higher U.S. interest rates. Meanwhile, the market for U.S. junk bonds, roughly 20% of which is tied to the energy sector, has also slumped.
While most economists see the drop in oil prices as a net positive for the U.S. economy, the Dow Industrials dropped roughly 5% from Dec. 5 to Dec. 16, retracing nearly half of their October-to-December advance. The Dow Transports also declined about 5%, though they retraced only about 31% of their October-to-November advance.
While both indexes have bounced, we view this month's pullback as significant. That means the averages' ability to rebound above the recent highs will be crucial. With closes above 17,958.79 in the Industrials and 9,202.84 in the Transports, the bullish primary trend would be reconfirmed. If the market rebounds but both highs are not surpassed, the low points reached in the current correction will become actionable bear-market points.
For now, with the Dow Theory still in the bullish camp, our buy lists have 91.9% to 97.2% in stocks.