Keep your eyes open


After moving within 100 points of the February closing high of 12,743.19, the Dow Industrials have retreated modestly ahead of earnings-reporting season. The Dow Transports reached a seven-month high on April 3 before dipping on a profit warning from bellwether United Parcel Service ($73; NYSE: UPS).

The near-term reaction to earnings news should be watched closely, for a close above 12,743.19 in the Industrials would represent a bull-market signal under the Dow Theory. A breakdown that brings the Transports below 4,140.29 would reconfirm the primary trend as bearish.

For now, subscribers should watch the averages, look for opportunities one stock at a time, and keep 25% to 35% of equity portfolios in a money-market or short-term bond fund. Our cash position will drop to a range of 15% to 20% on a bull-market signal, with our target weights increased to 3.0% for the 27 stocks on our Buy List and 2.5% for the 33 stocks on our Long-Term Buy List.

The road to ruin
Among our favorite quotes of William Hamilton, the second editor of The Wall Street Journal, is this classic from 1909: “It cannot be too often said that the road to ruin lies in dogmatizing on charts, systems and generalizations.”

While this may seem an odd quote to hear from the man credited with codifying the Dow Theory, Hamilton knew history never repeats exactly — and you should be wary of any forecaster who suggests otherwise.

We use the Dow Theory because it tends to work; when both the Industrials and Transports are reaching significant highs, owning stocks is usually a winning proposition. However, we are under no illusion that a bull-market signal would represent any sort of guarantee.

Similarly, we don’t believe those who argue that stocks and corporate profits are destined to decline further based on the experience of past recessions. Rarely have transportation stocks performed so well heading into a recession. Never before have overseas operations been so important to U.S. corporate profits. Never before have energy and commodity prices been so high.

Remember, your objective is to make money, not to predict where the market averages will be in a year. While market history and your assessment of the primary trend should factor in your analysis, you should keep an open mind and be relentless in your search for buying and selling opportunities.

We see opportunities in the energy, industrial, materials, and technology sectors. Top picks include BMC Software ($31; NYSE: BMC), Freeport-McMoRan ($108; NYSE: FCX), Manitowoc ($44; NYSE: MTW), and Transocean ($144; NYSE: RIG).

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