We don’t make stock-market predictions. We use a system designed to put the odds in our favor over the long haul, but we’re smart enough to know we’re not smart enough to know where the Dow Industrials will be at year-end 2010.
Our recommended cash position depends on the availability of attractively valued, quality stocks and the Dow Theory. The Dow Theory indicates whether the market’s primary trend is bullish or bearish — but it cannot predict the duration or extent of market moves.
When both the Dow Industrials and Dow Transports are reaching significant highs, the trend is presumed bullish and higher stock prices are likely. When both are reaching significant lows, the trend is presumed bearish and lower prices are likely.
As we see things, the June 7 closes of 9,816.49 in the Industrials and 4,037.98 in the Transports are significant lows. A rally that lifts both averages above this year’s highs would reconfirm the bullish primary trend. A breakdown below the June 7 levels would indicate the primary trend is bearish.
With closes below 9,816.49 and 4,037.98, our hotline will be updated and our recommended cash position will be increased. Partly because the Dow Theory is not infallible — and partly because we continue to find high-quality stocks trading at attractive valuations — we are unlikely to lift our cash position above 25% or 35%.
For now, we plan to hold 15% to 16.3% of our buy lists in Vanguard Short-Term Investment-Grade ($10.70; VFSTX) while looking for buying opportunities in all corners of the market, emphasizing attractively valued growers like DirecTV ($37; DTV) and Rogers Communications ($36; RCI).