Financials Key New Highs

12/27/2010


Helped by renewed strength in financial stocks, U.S. stocks enter 2011 with considerable momentum. Both the Dow Industrials and Dow Transports recently reached two-year highs, reconfirming the bullish primary trend under the Dow Theory.

Earnings-estimate trends for the December quarter have been mostly favorable, and this month's legislation to cut payroll taxes next year has boosted expectations for 2011 economic growth. Profits for the S&P 500 Index are expected to be up 13% in 2011, versus a 37% gain in 2010.

Investor sentiment is unusually optimistic, and recent leadership by the most speculative and aggressive stocks is grounds for concern. But, considering the bullish primary trend and the attractive values available in high-quality names, we're inclined to view a market decline as a correction in a bull market. For now, our buy lists have 15.9% to 17.3% in Vanguard Short-Term Investment-Grade ($10.77; VFSTX).


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