Dow Theory In Bullish Camp
The Dow Transports closed above their May high of 4,806.01, and the Dow Industrials closed above their April high of 11,205.03. With both averages at two-year highs, the primary trend should be regarded as bullish under the Dow Theory.
We are boosting the target weight for each of our 12 Focus List stocks by 0.7%, bringing our bond-fund exposure to 18% for the Long-Term Buy List and 16.6% for the Focus List and Buy List. Depending on the opportunities available, we intend to lower our bond-fund exposure further in coming months by adding more stocks or shifting some money into other funds.
Wall Street got the election results it wanted, with Republicans gaining a majority in the House of Representatives — and likely ensuring two years of government gridlock in Washington. But the 12% rally in the Dow Industrials since Aug. 31 had more to do with the anticipated launch of a quantitative-easing program from the Federal Reserve than expectations of a Republican victory.
In its Nov. 3 announcement, the Fed said it plans to buy $600 billion of long-term Treasury bonds by midyear 2011, a pace of about $75 billion per month. The Fed also pledged to keep short-term interest rates at “exceptionally low levels” for an extended period.
The Fed’s bond-purchasing plans, intended to keep interest rates low and inject liquidity into the economy, were roughly in line with consensus expectations. Yields on Treasury bonds edged higher on the Fed’s announcement, while stocks advanced only modestly. Still, the move to new highs in the Industrials following the announcement must be viewed as encouraging.
With the election and Fed announcement behind us, and third-quarter earnings season nearly over, near-term market action is likely to hinge on economic news. We don’t see the new highs in the Industrials and Transports as signaling a new bull market. Rather, the new highs signal that our move into the bearish camp this summer was premature, that the bull market that began in March 2009 remains intact.
Based on the percentage of NYSE stocks trading above their 200-day moving averages and the relatively high levels of bullish investor sentiment, a near-term market pullback would not be surprising. However, the new highs in the Industrials and Transports suggest such a pullback should be viewed as a correction in an ongoing bull market. For new buying, one particularly attractive stock is Altera ($32; ALTR), a new addition to the Focus List.