Choppily Going Nowhere

1/4/2016


U.S. stocks ended 2015 the way they spent most of the year, trading choppily without making much headway in either direction. For now, subscribers should watch the averages while maintaining a mostly invested, somewhat cautious posture. Our buy lists have 84% to 85.2% in stocks, with the remainder in a short-term bond fund.

Slumping Transports

When both the Dow Industrials and Dow Transports are reaching significant lows, the primary trend is presumed bearish under the Dow Theory — and investors should expect lower stock prices.

The Dow Transports closed at a fresh 20-month low of 7,364.04 Dec. 18, reflecting continued weakness in the economically sensitive railroad and trucking groups. The trend in the Transports is indisputably bearish, but both averages must
reach significant lows to shift the Dow Theory to bearish from bullish.

After rebounding from the August lows to close at 17,918.15 on Nov. 3, the Dow Industrials slumped nearly 800 points to close at 17,128.55 on Dec. 18. Over the next six trading days the Industrials bounced nearly 3.5%, so we are inclined to classify 17,128.55 as a significant low.

A move below 17,128.55 would be bearish, especially if the Transports close below their Dec. 18 closing low. Even without another fresh low in the Transports, we will likely raise some cash if the Industrials close below 17,128.55.

On the upside, a close above 17,918.15 would be encouraging. Also, the Industrials and S&P 500 Index are within 4% of all-time highs, and breakouts above those respective levels of 18,312.39 and 2,130.82 would be bullish.

If stocks react positively to December-quarter earnings reports, pushing the Industrials and S&P 500 to all-time highs and allowing the Transports and other cyclical groups to stabilize, we will probably lower our cash position.

As always, our cash position will also depend on the opportunities in individual stocks. Within the broad S&P 1500 Index, the percentage of stocks with low, average, and high price/earnings ratios is roughly in line with 20-year norms. But profit growth has slowed, making it harder to find attractively valued growers.

Conclusion

December-quarter results, due beginning in mid-January, will matter more than usual this year. Subscribers should watch the averages while looking for opportunities one stock at a time. Top picks include Alaska Air Group ($81; ALK), Gilead Sciences ($102; GILD), and Lear ($124; LEA).


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