Bull Market Reconfirmed

7/10/2017


The Dow Jones Transportation Average recently closed above its previous all-time high of 9,593.95. The new high in the Transports corroborates recent highs in the Dow Jones Industrial Average and thus reconfirms the market's bullish primary trend, according to the Dow Theory.

New highs in the Transports

An important tenet of the Dow Theory is confirmation between the Dow Jones Industrials and Transports. The theory requires highs in both averages to confirm a bullish primary trend. New highs in one average unaccompanied by new highs in the other is called divergence, at times a precursor to a change in trend.

Both the Dow Industrials and Transports posted new highs on March 1. However, for the next four months, the Dow Industrials trended upward, while the Transports trended sideways to lower.

The Transports may have cleared up the divergence by closing at an all-time high on July 3, but the new high does not preclude a correction. In fact, it is not unusual for the broad market to pull back following a fresh reconfirmation. Don't fear buying on such a correction.

Strength of the economically sensitive Transports provides validation that the economy remains on sound footing and will likely keep progressing in the second half of the year. Further improvement should bolster other economically sensitive sectors, some of which, such as the financials, lagged in the first half of the year.

It will be interesting to see if the Transports' rally can jump-start small-cap stocks. Small-caps, which tend to be more sensitive to economic conditions than larger companies, lagged in the first half of the year. The Russell 2000 Index of small-cap stocks rose 5%, versus a 9% gain in the large-cap S&P 500. However, the breakout in the Transports might become the catalyst for a similar breakout in small-caps.

Conclusion

With the Dow Transports making new highs and reconfirming the market's bullish primary trend, the Forecasts is comfortable with our recommended lists having 94.8% in stocks; we may look for opportunities to up that exposure, especially on market declines.

For new buying, financials have behaved better in recent trading and promise healthy dividend growth over the next 12 months. Among the banks, Focus List Buy Citizens Financial Group ($37; CFG) and Buy-rated J.P. Morgan Chase ($94; JPM) and Zions Bancorp ($45; ZION) offer appealing combinations of growth and income.


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