Industrials Confirm Bullish Trend

3/22/2010


The Dow Industrials moved above their Jan. 19 closing high of 10,725.43, confirming a similar move in the Dow Transports. While we would have preferred to see a bigger correction from the January highs, the weight of the evidence suggests the primary trend is bullish.

Both the Industrials and Transports are at 17-month highs, and the broad market continues to melt higher amid an improving profit outlook, mild inflation, and contained bond yields. Eight of the 10 sectors of the S&P 500 Index have advanced this year, and all 10 have participated in the rally from the February lows.

What to do now

Our recommended cash position is now 10% to 15%, meaning 10% to 15% of the portion of your portfolio allocated to equities for the long haul should be in a short-term bond fund. We’re making changes to our buy lists to reduce our target cash position to 13% to 15% immediately, and we hope to lower our cash position further based on the opportunities available in individual stocks.

For each of the 34 stocks on our Long-Term Buy List, our target weight has been raised to 2.5%, bringing total stock-market exposure to 85%. For the Buy List, all 28 stocks now have a target weight of 3.1%, for a total stock-market exposure of 86.8%. Our equal-weighted Focus List always has the same stock-market exposure as our Buy List. Our recommended mutual-fund portfolios will be reviewed next week.

Depending on the trading commissions you pay, it may not make sense to add to every stock in your portfolio. But chances are some of your stocks are underweight relative to others, so you should be able to get 85% to 87% of your portfolio in stocks with a handful of trades.

For the remaining 13% to 15% of your portfolio, we continue to like Vanguard Short-Term Investment-Grade ($10.71; VFSTX), a relatively low-risk bond fund with a yield of 2.4% and an expense ratio of just 0.26%. The fund’s average bond maturity is 3.3 years, limiting its downside risk if interest rates jump. An emphasis on high-quality bonds limits the fund’s credit risk.

Stock selections

For new buying, especially promising Focus List picks include Aflac ($54; AFL), BMC Software ($39; BMC), IBM ($129; IBM), Raytheon ($57; RTN), Ross Stores ($54; ROST), and Travelers ($53; TRV). Among stock funds, Heartland Select Value ($27; HRSVX) represents a top pick among midcap funds, while Vanguard Dividend Growth ($13; VDIGX) offers a top pick among large-company funds.


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