Transports Reconfirm Bullish Trend
The Dow Transports closed above their November high of 9,202.84, corroborating a recent move to new highs in the Dow Industrials. With both averages reaching all-time highs, the Dow Theory is squarely in the bullish camp.
Subscribers should maintain a constructive and opportunistic posture toward U.S. stocks, emphasizing attractively valued stocks supported by good earnings momentum and solid profit-growth prospects. Our Focus List and Buy List have 97.2% in stocks, versus 91.9% for our Long-Term Buy List.
Improved market breadth
For the averages, 2014 ended much like 2013, with the Industrials and Transports reaching all-time highs in December. While it's worth remembering that the market suffered a sharp correction in January 2014, the more important point is that the pullback represented a buying opportunity.
Timing secondary corrections with precision is very difficult. So, if we can still find attractively valued growers, we tend to maintain a mostly invested posture unless we have doubts regarding the majority money opinion. Today we have no such doubts, mostly because of the Dow Theory reconfirmation but also because of improved market breadth.
Some question the importance of new highs in the Transports, arguing the average has been lifted by the notoriously volatile airline group. But broader measures of the transportation sector are also near all-time highs. The most important transportation group, railroads, is within 4% of all-time highs.
Moreover, the small-company Russell 2000 and S&P SmallCap 600 indexes, which lagged through most of 2014, have played catch-up to finally reach all-time highs in December. The S&P MidCap 400 Index also reached all-time highs in December.
The S&P 1500 advance-decline line — a running daily total of advancing minus declining stocks in the broad S&P 1500 Index — has reached a series of all-time highs in recent months. While the large and midcap stocks in the S&P 500 and S&P 400 have fueled much of this rise, the advance-decline line for the S&P 600 recently hit its first new high since July.
The majority money opinion is clearly bullish. That does not mean the market won't suffer a near-term correction, and it does not guarantee that the next correction will be followed by another move to all-time highs. But it does mean the odds favor the bulls.
For now, a nearly fully invested posture remains appropriate. For new buying, especially attractive year-ahead picks include Apple ($113; AAPL), Alaska Air ($60; ALK), F5 Networks ($133; FFIV), and Jones Lang LaSalle ($153; JLL).