Amid Turbulence, Investors Play Defense


Worries regarding Greece's debt crisis and China's stock-market slump have triggered turbulent trading in U.S. stocks, while yields on U.S. Treasury bonds have pulled back from recent highs amid a flight to safety.

With a breakdown below 17,164.95 in the Dow Industrials, the Dow Theory would move to the bearish camp — and our stock-market exposure would be lowered. For now, we are maintaining a mostly invested posture, though after this week's downgrade of Aetna ($113; AET) our buy lists have 82.5% to 83.1% in stocks.

Internal rotation

While the Dow Industrials and S&P 500 Index remain in the trading ranges that have prevailed since December, the partly sideways trading has concealed some fierce internal rotation. Since June 30, the cyclical energy and materials sectors have delivered the worst returns, while the defensive sectors of consumer staples and utilities have done best.

Energy shares and oil prices have dropped on fears of a slump in Chinese demand. China's main stock indexes are down more than 30% from highs reached in June, and China is the world's second-largest consumer of crude oil. Copper prices have reached six-year lows.

Meanwhile, yields on 10-year Treasury bonds have dipped to about 2.2% from nearly 2.5% in late June, helping spark a rebound in the rate-sensitive utility sector.

Trends within our Quadrix rating system also reveal a shift away from more aggressive stocks. In seven of the eight rolling 12-month periods through June 30, the cheapest one-fifth of stocks based on Quadrix Value scores have underperformed the average stock in the broad Dow Jones U.S. Index. Top stocks based on Quality scores, reflecting long-term growth rates and returns on equity and investment, have outperformed in 19 consecutive 12-month periods.

Value standouts tend to do best when investors' risk tolerance and optimism regarding the economy are on an upswing, while Quality leaders tend to outperform when investors are seeking reliable growers.


Recent market action has been discouraging. For now, we intend to watch the averages while looking for buying and selling opportunities on a stock-by-stock basis. For new buying, Comcast ($62; CMCSa) and Jones Lang LaSalle ($172; JLL) represent top picks.

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