Dow Theory in bullish camp


The Dow Industrials closed above 12,743.19, confirming a move to significant highs in the Dow Transports and returning the Dow Theory to the bullish camp. Our recommended cash position has been reduced to a range of 15% to 20%, meaning 15% to 20% of equity portfolios should be held in a money-market or short-term bond fund. As opportunities develop in individual stocks, our cash position will likely be reduced further.

Profit reports spark stocks
Reflecting some encouraging earnings reports, the Industrials rallied to three-month highs. Among the more than 100 companies in the S&P 500 Index that have reported March-quarter earnings, more than 60% have exceeded consensus estimates — in line with the norm since 1994, according to Thomson Financial.

Combining reported results for companies that have reported and consensus estimates for those that have not, Thomson Financial says March-quarter earnings for the S&P 500 Index are on track to be down 14.6%, suggesting S&P 500 earnings will be down in three straight quarters for the first time since 2001. However, much of the weakness reflects write-downs and loan losses among financials, as S&P 500 earnings outside the financial sector are expected to be up 6.7%.

As always, it is the market’s reaction that shows whether results have met expectations. So far, despite some notable shortfalls among financials, the market’s reaction has been encouraging. The positive share-price reactions for companies exceeding expectations have been more dramatic than the negative reactions for those missing expectations. Also, several financial stocks have rallied despite missing consensus estimates, suggesting bad news was already reflected in the stocks.

A bull-market signal does not mean stocks will rally higher without interruption, and near-term moves in both directions are likely as more earnings are released. But, with the Dow Theory’s return to the bullish camp, a more constructive stance toward stocks is appropriate. Our recommended cash position, now 15% to 20%, is likely to be reduced as opportunities develop in individual stocks.

For new buying, several technology names appear especially attractive, including BMC Software ($34; NYSE: BMC), IBM ($124; NYSE: IBM), and Microsoft ($30; NASDAQ: MSFT). Outside technology, top picks include Freeport-McMoRan ($119; NYSE: FCX), General Dynamics ($88; NYSE: GD), and Oceaneering International ($69; NYSE: OII).

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