Bullish Primary Trend Reconfirmed


Bullish primary trend reconfirmed

With the Dow Industrials' recent move above their October high of 13,610.15, the market's bullish primary trend was reconfirmed. While near-term trading could be choppy because of earnings news and budget negotiations in Washington, the Dow Theory is squarely in the bullish camp.

Subscribers should maintain a constructive, opportunistic stance toward U.S. stocks. Our buy lists have 91% to 94% in stocks. So, of the portion of your portfolio committed to equities for the long haul, we are recommending you hold 91% to 94% in stocks and the remainder in a short-term bond fund. As buying opportunities arise in attractively valued growers, we may lift our stock-market exposure closer to 100%.

Significant highs

When both the Dow Industrials and Dow Transports reach significant highs, the primary trend is presumed bullish — and higher stock prices are likely. With the Dow Transports at all-time highs and the Dow Industrials at their highest level since 2008, the Dow Theory is unambiguously bullish.

Several market watchers, including some who call themselves Dow Theorists, argue that the Dow Industrials need to close above their 2007 all-time high of 14,164.53 for a true all-clear signal. This view represents a fundamental misunderstanding of the Dow Theory, as there is no requirement that the averages reach all-time highs for a bull-market signal. Indeed, the Dow Theory would not work if all-time highs were required, as investors would only get back into the market after the averages had recovered all their bear-market losses.

A move above 14,164.53 could trigger some panic buying from cash-heavy portfolio managers, especially if the S&P 500 Index also reaches all-time highs. Still, you should not defer new purchases waiting on all-time highs. Instead, look for opportunities on a stock-by-stock basis, focusing on high-quality stocks with modest valuations. Among our recommendations, especially attractive picks include Helmerich & Payne ($61; HP), Magna International ($53; MGA), and Mylan Laboratories ($28; MYL).

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