Daily Gains Letter

Dow Jones Industrials Still Hot; How to Play the Correction

By for Daily Gains Letter |

180313_DL_clarkAction in the stock market is robust. Some economic news has shown improvement, but really, investors are just betting on first-quarter earnings.

The Dow Jones Industrials have been strong, outperforming the other indices and revealing how skittish investors are about the stock market’s advance. Investors are buying Johnson & Johnson (NYSE/JNJ) because it’s safe. When the party ends, Johnson & Johnson is less risky.

Institutional investors are betting on stocks because there really isn’t anywhere else to go. The bond play is over, currencies are too risky, and the commodity price cycle is taking a break. While it does seem unbelievable, the Dow Jones Industrials will likely keep ticking higher before the month is out.

While the action is hard to believe, considering the Main Street economy, the Dow Jones Transportation Average is still plowing ahead, leading the rest of the stock market. Regardless, this is the classic sign of further strength in share prices.

The stock market is not expensively priced, and it’s up to corporate earnings to tick higher, so they we don’t create a bubble. Practically, as a stock market investor, it doesn’t pay to fight the Federal Reserve or the tape. The action is the action; if you want to play the market, “why” doesn’t matter too much.

But if you’re an investor and you own, or would like to own, shares in blue chips like the Dow Jones Industrials, it’s tough to be a buyer when the stock market is at all-time highs.

I wouldn’t buy this market, but when there is a major correction, it will be an interesting opportunity to consider. Of course, it all depends on the economic news at the time. There is a little momentum in the numbers now, but a lot of it is related to price inflation. This doesn’t put people back to work.

The stock market is fairly valued, given current earnings, and this offers a big safety net for investors. The Walt Disney Company (NYSE/DIS), a member of the Dow Jones Industrials, is trading right at its all-time record high. But its price-to-earnings ratio is only around 18.0, with a 1.3% dividend yield. The company’s stock chart is below:

 

dl_0318_image001Chart courtesy of www.StockCharts.com

Looking at the chart, it’s hard not to think that The Walt Disney Company isn’t due for a correction. It’s like the rest of the market; it’s due for a correction, but we don’t know when.

The Dow Jones Transportation Average and Dow Jones Industrials are looking really good here in terms of their potential for further capital gains. But Alaska Air Group, Inc. (NYSE/ALK) is up 25 points on the stock market since last October, which is pretty spectacular. It’s hard to imagine more capital gains from this stock.

The proof will be in the numbers this earnings season. Dow Jones components are expected to produce high single-digit gains in revenues, with mostly flat earnings. Even if the numbers come in strong, the stock market should sell off anyway. It’s the old “buy on rumor, sell on news” type of play. Pre-season earnings have so far been good.

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