Industrials' Failure To Launch Worrisome

7/25/2011


 

When a stock fails to reach new highs despite seemingly good news, it’s a bearish omen.

The same holds true for the stock market, which Dow Theorists monitor based on the action of the Dow Industrials and Dow Transports. Unless the Industrials can close above their April high of 12,810.54, recent new highs in the Transports will be unconfirmed — and the market will remain vulnerable to a bear-market signal.

A close above 12,810.54 would reconfirm the bullish primary trend. Nothing in the Dow Theory says the averages must reach new highs on the same day or week, but a lengthy delay would indicate uncertainty regarding the business outlook. More important, without a close above 12,810.54, a breakdown below the June lows of 11,897.27 in the Industrials and 5,060.59 in the Transports would suggest the primary trend is bearish.

Apart from Dow Theory considerations, the market’s failure to reach new highs amid mostly positive earnings news is grounds for concern. According to Bloomberg, 54 of the 61 companies in the S&P 500 Index that have reported earnings since July 11 have exceeded consensus estimates.

Also, expectations for the second half of 2011 have held firm since earnings season began. Consensus estimates project per-share profits for the S&P 500 Index will be up 14% for 2011 and 15% for 2012.

Considering that seemingly bullish backdrop and the comparatively modest valuations of the 30 giant stocks that comprise the Dow Industrials, a continued failure to close above 12,810.54 would suggest the majority money opinion is losing conviction — perhaps because of concerns regarding the debt burdens of the U.S. and Europe.

Conclusion

With closes below the June lows of 11,897.27 in the Industrials and 5,060.59 in the Transports, the stock-market exposure of our buy lists will be cut to 80% immediately — and our hotline will be updated with specific instructions. For now, subscribers should watch the averages while holding about 12% or 13% of equity portfolios in a short-term bond fund.


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