Odds Still Favor The Bulls

12/7/2015


U.S. stocks have held up well amid mixed economic reports, keeping the S&P 500 Index within 2.5% of all-time highs. Subscribers should maintain a mostly invested, slightly cautious posture.

Following this week's upgrades of Jabil Circuit ($25; JBL) and Goodyear Tire & Rubber ($35; GT), our buy lists have 84% to 85.2% in stocks. The rest is in a short-term bond fund. Of the proportion of your portfolio committed to equities for the long haul, we suggest holding 84% to 85.2% in stocks.

Acronyms are fun — and sometimes scary

The capitalization-weighted S&P 500 Index, one of the most widely used performance benchmarks for portfolio managers, has outperformed the typical U.S. stock this year. In fact, the equal-weighted version of the S&P 500 was down 0.7% excluding dividends through Dec. 1, versus a 2.1% gain in the capitalization-weighted index.

Helping the capitalization-weighted index have been big gains in the so-called FANG stocks — Facebook ($106; FB), Amazon.com ($676; AMZN), Netflix ($129; NFLX), and Alphabet ($778; GOOGL). History suggests it pays to be wary when the most richly valued stocks are leading the market.

Others argue that the gains in these stocks have masked deterioration in the underlying stock market. Only 38% of New York Stock Exchange stocks are trading above their 200-day moving average, suggesting relatively few stocks are in clearly bullish uptrends.

If most stocks are not in uptrends and the S&P 500 Index is near its highs, the market is by definition narrow, according to some bears. Similar divergences were resolved with bear markets in 2000 and 2007, according to work by Jonathan Krinsky of MKM Partners recently cited in Barron's.

The bears have valid grounds for concern regarding the market's leadership, as a healthy bull market typically has more than one theme driving stocks higher. But it's tough to argue that the broad market is deteriorating, as more stocks are rising than falling.

The S&P 1500 advance-decline line, a daily running total of advancing minus declining stocks in the broad S&P 1500 Index, reached an all-time high on Dec. 1. So did advance-decline lines for the large-company S&P 500 and S&P MidCap 400.

Conclusion

We'd like to see more stocks participating in the rally, and we'd like to see the Dow Transports show improved relative strength. But you can't always get what you want, and we still think the weight of the evidence favors the bulls.


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