Earnings Season Arrives Amid Volatility


Despite mostly impressive results from the bellwether companies that have already posted December-quarter results, stocks have been volatile in recent trading. Both the Dow Industrials and Dow Transports closed at fresh rally highs within the past week, so the Dow Theory is squarely in the bullish camp. But the averages have been moving higher without interruption since late November, and the early reaction to fourth-quarter results suggests investors' expectations may have become overly optimistic.

With sentiment surveys also pointing to widespread optimism and stocks extended on a technical basis, a near-term pullback would not be surprising. For the Industrials, a typical short-term correction would bring the average to 11,275 to 11,575. For the Transports, a dip to 4,900 to 5,050 would be fairly typical. In our view, a pullback would represent an opportunity to deploy more of our cash reserves. For now, we're holding 10% to 15% of equity portfolios in a short-term bond fund.

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