Primary Trend Not In Doubt


On July 3, a surprisingly strong employment report for June reassured investors and lifted nearly all the major averages to all-time highs. A few days later, after fierce selling in some biotechnology and other recently revived momentum names, investors entered earnings season amid widespread apprehension.

When stock markets seem to be of two minds, which one should you listen to?

From a Dow Theory perspective, that question is easy to answer. Both the Dow Industrials and Dow Transports closed at all-time highs on July 3, reconfirming the bullish primary trend. What's more, a change in the market's opinion to bearish will not be signaled until three things happen:

• First, the market needs to suffer a significant correction. To qualify as significant, a correction typically needs to retrace one-third to two-thirds of the preceding advance over three to 12 weeks, though nowadays significant corrections are often shorter than three weeks. For the Industrials, a one-third to two-thirds retracement of the April 11-to-July 3 advance would put the index at 16,374 to 16,721. For the Transports, the equivalent range is 7,673 to 7,984.

• Second, the averages need to rebound without both closing above the highs reached prior to the correction. If both close at new highs, the lows reached in the correction would no longer be significant. If one or both fail to reach new highs in the rebound rally, the lows reached in the correction would be actionable bear-market points.

• Third, both averages need to close below those bear-market points.

Looking beyond the Dow Theory, you should always be asking yourself another question: Is this as good as it gets?

Now that stock valuations are somewhat expensive and consensus expectations are clearly anticipating a pickup in corporate profit growth, are disappointments more likely than positive surprises? June-quarter reports — and the market's reaction to the results and forward guidance — will go a fair way in answering that question.

The answer is likely to vary by sector and industry group and company, and we will be quick to raise cash if we cannot assemble a diversified portfolio of attractively valued growers. For now, though, we are maintaining nearly fully invested portfolios as we look for buying and selling opportunities on a stock-by-stock basis.

Our Focus List and Buy List have 99.6% in stocks, while our Long-Term Buy List has 96.3%. For new buying, automotive parts suppliers Lear ($91; LEA) and Magna International ($109; MGA) remain top picks. ManpowerGroup ($83; MAN), a play on improvement in the labor market, also represents a timely pick.

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