Averages Asking Questions


The Dow Industrials and S&P 500 Index are back within striking distance of their April highs, helped by improvement in such year-to-date laggards as financials, health care, and technology. Continued strength in these sectors would be encouraging, as would a move above the April 20 highs in the Dow Industrials, Dow Transports, and S&P 500.

For now, we are keeping about 20% of our buy lists in a short-term bond fund, but that percentage may change based on market action and the opportunities we see in individual stocks. As we watch the market, we'll seek answers to five questions:

Can the April 20 closing highs of 18,096.27 in the Dow Industrials, 8,109.19 in the Dow Transports, and 2,102.40 in the S&P 500 be surpassed? All three averages rallied sharply from lows reached earlier this year, then suffered meaningful pullbacks from their April 20 highs. While only the Industrials and Transports figure in classic Dow Theory analysis, new highs in all three would suggest the primary trend is bullish.

Can the all-time highs of 18,312.39 in the Dow Industrials and 2,130.82 in the S&P 500 be surpassed? With sentiment fairly pessimistic, a move to all-time highs in these widely followed indexes could brighten investors' mood — and encourage cash-heavy investors to put some money to work.

Also, with all-time highs in the Industrials and a close above the April highs in the Transports, the Dow Theory would clearly be in the bullish camp. When both averages reach significant highs, the primary trend is bullish. By definition, all-time highs are significant. The April 20 highs in the Transports also seem unambiguously significant, as they came after a 13% rebound from the multiyear low reached in January.

Can the railroads get up some steam? U.S. railroads face at least a couple more tough quarterly profit comparisons, and consensus earnings estimates for the group continue to erode. If the widely followed railroad stocks can extend their 2016 rebound, it would suggest investors see better times ahead for the U.S. industrial sector.

Can the broad market continue to move higher? The S&P 1500 advance-decline line, a running daily total of advancing minus declining stocks, reached all-time highs earlier this month. Historically, such broad-based strength has been a bullish indicator, especially when the major averages are also reaching new highs.

Can less-defensive names take the reins of market leadership? By all accounts, stocks in low-volatility sectors like utilities and consumer staples have grown expensive relative to historical norms. For the market to make meaningful progress, the market likely needs new leadership.

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