Stocks have rebounded nicely in recent weeks, with major indexes close to recouping all the losses posted in the first five weeks of this year. While this rally could extend further in the near term, investors should not discard the possibility of the market taking a breather and perhaps retesting previous lows.
Indexes near breakeven for year
To say 2016 got off on a bad foot would be an understatement. Indeed, the Dow Industrials declined 10% from the end of 2015 through Feb. 11, bottoming at 15,660.18. The Transports suffered an even harsher and swifter decline, falling nearly 12% through the first 20 days of January to bottom at 6,625.53.
Since those low points, however, the Dow averages and other major indexes have posted impressive rallies, carrying a number of indexes close to breakeven for the year.
The Dow Transports have staged the most impressive rally, rising nearly 17% since Jan. 20 and now showing a 3% gain for 2016.
The strength of the Transports resonates because transportation stocks are perhaps the most economically sensitive sector. The market's pullback earlier this year stemmed, in part, from fears of a global economic slowdown and even recession; the Transports' rally seems to have softened those fears a bit, which has helped the broad market.
From a Dow Theory perspective, strength in the Industrials and Transports is a positive development, but investors should not take the gains as a guarantee of good things to come. The odds still favor a pullback following this rally, likely one meaningful enough to represent a retest of the previous lows.
How the Dow averages behave during the next significant pullback will determine whether the primary trend remains bearish or turns bullish. Closes below the 2016 lows of 15,660.18 for the Industrials and 6,625.53 for the Transports would reconfirm the bearish trend.
On the other hand, should one or both of the averages hold their previous lows on the next significant pullback, and both then rally above the highs being established during the recent rebound, the primary trend would turn bullish.
Strength in the major indexes, especially the economically sensitive Transports, is a positive development. However, a successful retest of the previous lows is required before the primary trend can turn bullish. Our buy lists still have 18% to 19% in a short-term bond fund. For investors holding more cash than we recommend, attractive total-return stocks include Focus List Buys Gilead Sciences ($90; GILD) and Apple ($106; AAPL).