Listless Trading No Reason To Sell


Amid low volatility and low trading volumes, the bull market grinds on. While more volatile trading is likely as earnings-reporting season approaches, a nearly fully invested posture remains appropriate. The primary trend is squarely in the bullish camp under the Dow Theory, and we are still finding high-quality growers trading at reasonable valuations. Our buy lists have 96.3% to 99.6% in stocks.

Running on empty?

The S&P 500 Index has not had a daily move of more than 1% since mid-April, the longest such streak since 1995. The S&P 500 has not suffered a 10% correction in 32 months, far longer than the average of 18 months between such pullbacks since 1945. Since April 1, average daily trading volume in S&P 500 stocks has been more than 20% below its five-year average.

Among S&P 500 sectors, the defensive utility and health-care sectors rank among the best year-to-date performers, while such early-cycle sectors as consumer discretionary and industrials rank among the worst. Meanwhile, in another sign of risk aversion, the large-company S&P 500 has handily outperformed the S&P SmallCap 600 Index.

For those of the bearish persuasion, the market's listless trading and the leadership of defensive sectors are symptomatic of a bull market running on fumes. Historically, investors have often migrated toward safe, noncyclical stocks in the late stages of a bull market, so the bears' argument merits attention. But, for several reasons, we think raising a big cash position is premature:

• First, a bull market can refuel many ways. A mere 5% to 10% pullback is often enough to rebuild the wall of worry that fuels stock-market advances. Without very adept timing, trying to trade ahead of such moves is very difficult.

• Second, while defensive sectors have rallied, more aggressive groups have held up relatively well. The economically sensitive Dow Transports reached all-time highs this month, as did the Morgan Stanley Cyclical Index. Even the homebuilder group, a key early-cycle industry that has slumped since early March, has shown signs of life since mid-May.

• Third, the broad market is showing decent strength. Advance-decline lines for the large-company S&P 500, midcap S&P 400, and broad S&P 1500 indexes reached all-time highs this month. The advance-decline for the small-company S&P 600 has rebounded within striking distance of its March high.


While trading is likely to become more volatile, and 5% to 10% pullbacks can occur with little or no warning, we are maintaining a nearly fully invested posture. Lear ($88; LEA) is a top pick.

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