Large-Caps Shine as Dow Jones Industrial Average Toys with All-Time High

Industrial Average Toys with All-Time HighAny way you slice it, the Dow Jones Industrial Average had a great January—one of the best in years. Yet the stock market still isn’t trading all that well. In fact, I don’t really like the trading action at all. The market has kind of been ignoring news, both good and bad, and moving listlessly, without trend. If the uncertainty in the world, the U.S. economy, and Washington is reflected in the stock market, then I’d say it is clearly showing it. The Dow Jones Transportation Average experienced a very meaningful breakout, and the Russell 2000 index is at an all-time high; so higher shares prices are probable for the near term. The big question is: will a rising market be sustainable?

Without question, I think equity investors need to be highly conservative going forward. Sure, there are lots of companies that are doing great on the stock market (many of which have been mentioned in our past articles), but no matter how you look at it, real economic growth is minimal. Furthermore, the stock market is basically trading right at its all-time high (except the NASDAQ, but technology stocks were way overdone anyway). The Dow Jones has led the other indices so far this year, and this blue-chip move is very positive. But realistically, I wouldn’t really be buying in this market.

The stock market and the Dow Jones have room to go higher in the near term, largely because of the Dow’s reasonable valuation. With artificially low interest rates still intact and the bull market in bonds coming to an end, it makes sense that fund flows for equities are up. But what I’d really like to see this year is a major correction—and we just might get it. If we do, then investors would be in a much better spot to be taking on new positions.

I’ve been following a number of large-cap dividend paying stocks for quite some time now, and even though there are a lot of great companies that I like, they’ve already gone up on the stock market. This makes buying them much more risky now.

It’s actually very difficult to employ the buy low/sell high investment strategy in this market. The good companies (which tend to be the best stocks) aren’t usually down for long. So, stock market investors need to be patient and wait for their favorite positions to pull back. Speculators, on the other hand, can be playing the current momentum—even with a leveraged exchange-traded fund (ETF) on the S&P 500, for example.

Price strength in the Dow Jones Industrial Average is very meaningful, because this index is representative of the U.S. economy, with an industrial bent. Union Pacific Corporation (NYSE/UNP) should be included in the Dow Jones Industrials; I don’t know why Hewlett-Packard Company (NYSE/HPQ) is there. A lot of stocks within the Dow Jones Industrials have actually done extremely well on the stock market over the last few years, but the periods of non-performance are lengthy as well. That’s why dividends are so important. (See “Dow Jones Industrials Shine as Market Awaits FOMC.”)

The stock market has legs over the near term, and so does the economic news. Sell in May and go away, as the saying goes, is my best advice for this year. Technically speaking, the U.S. economy is close to exceeding its historical average duration between recessions.

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