Bull Market Reconfirmed


The Dow Industrials and Dow Transports closed above their mid-February highs, reconfirming the bullish primary trend under the Dow Theory. Near-term market action will hinge on results for the March quarter, but the rebound to new highs in both averages bodes well for the year ahead.

Our Focus List and Buy List now have 91.5% in stocks, versus 88.0% for our Long-Term Buy List. For all three lists, the remainder is held in Vanguard Short-Term Investment-Grade ($10.72; VFSTX), a relatively low-risk bond fund. The average weighted maturity of the fund's bonds is roughly three years, limiting its vulnerability to higher interest rates.

Major bull swing

With both the Industrials and Transports closing at the highest level since the first half of 2008, the Dow Theory is squarely in the bullish camp. As founding Dow Theorist William Hamilton wrote in 1921, "On the well-tested rule of reading the averages, a major bull swing continues so long as the rally from a secondary reaction establishes new high points in both averages."

The Dow Theory cannot predict the duration or extent of a bull market, and the recent bull-market confirmation does not preclude a near-term pullback. But any pullback should be viewed as a correction in an ongoing bull market — and an opportunity to pick up shares of high-quality growers at a discount.

The next such opportunity may come with March-quarter earnings season, which kicks off April 11 and really gets going the following week. So far, despite the disaster in Japan and sharply higher oil prices, preannouncement trends have been mostly favorable, with the ratio of negative-to-positive warnings better than long-term norms.

Profits for the S&P 500 Index are projected to be up 13% from the year-earlier quarter, with eight of the index's 10 sectors expected to report growth. Consensus profit estimates for the index have risen since early January, though all the improvement came from the energy, materials, and technology sectors.


As always, the market's reaction to March-quarter reports will reveal whether results have met expectations. With investor sentiment now quite bullish by some measures, including the market-timing advice of newsletters, profit disappointments are likely to meet a harsh reception. While subscribers should be wary of rushing into stocks hit by earnings shortfalls, pullbacks triggered by broad market dips should be seen as opportunities. For new buying right now, Hess ($86; HES), MasterCard ($263; MA), and Oracle ($34; ORCL) offer top picks.

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