Bullish Trend Reconfirmed


Helped by a favorable reaction to the Federal Reserve's Sept. 17 statement on monetary policy, the Dow Industrials and Dow Transports closed at all-time highs. The new highs reconfirmed the bullish primary trend under the Dow Theory, and we are maintaining a nearly fully invested posture. Our buy lists have 94% to 98% in stocks.

Bad breadth

While the new highs in the Industrials and Transports are encouraging, we'd like to see better action from the broad market. The advance-decline line for the S&P SmallCap 600 has not reached new highs since July 3, reflecting a shift away from higher-risk names.

Among members of the Russell 2000 Index of small stocks, more than 40% are down at least 20% from their 52-week high, according to Bloomberg. Only 6% of S&P 500 stocks are down that much.

Nothing says all types of stocks must advance in lockstep for a healthy bull market, and our growth-at-a-good-price approach is working nicely in the current environment. But a broad flight out of higher-risk names is generally bad news, as such stocks tend to underperform in the late stages of the business cycle.

However, the recent surge in the economically sensitive Dow Transports is encouraging. The airline, railroad, and trucking groups are trading near all-time highs. Among major transport groups, only airfreight is meaningfully below July highs, but industry heavyweight FedEx ($160; FDX) surged to all-time highs this month on better-than-expected results.

In contrast, U.S. industry groups more sensitive to overseas demand — including coal, industrial machinery, and oil — have struggled. European stock indexes are trading near six-month lows. Broad indexes of Asian stocks are down 3% to 5% from highs reached this summer, hurt by worries about a slowdown in China.


While we'd like to see better action from the broad market, the weight of the evidence still favors higher U.S. stock prices.

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