Daily Gains Letter

Stock Market Advance Needs Technology Stocks to Step It up a Notch

By for Daily Gains Letter |

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Most components of the Dow Jones Industrial Average are doing well—some exceptionally well. Alcoa Inc. (NYSE/AA) is one of the laggards, and really, all the position has done on the stock market is return to its historical norm. The company reports in a couple of weeks, and it is currently richly valued on a price-to-earnings (P/E) ratio.

The opposite of Alcoa’s position is 3M Company (NYSE/MMM), which is trading at an all-time record high on the stock market and is not expensively priced. This Dow Jones component has basically been ticking higher since the beginning of 1962. It traded sideways between 2005 and 2012, but it’s a consistent winner for sure.

The Dow Jones Transportation Average and the Dow Jones Industrial Average have been leading the stock market in recent history. The strength in transportation stocks is highly significant in terms of a leading indicator for the rest of the stock market. And the strength in the Dow Jones Industrials isn’t as much an expansion of valuations for these specific old economy stocks; it’s because business conditions for these companies are pretty decent.

Institutional investors have been buying safer names, which is why Dow Jones component companies like The Procter & Gamble Company (NYSE/PG) and Johnson & Johnson (NYSE/JNJ) have traded up so strongly since the beginning of the year. These companies are appreciating like fast-growing technology stocks. It is a bull market signal.

We’re on the cusp of a new earnings season, and the numbers, so far, have been decent, peppered with a few disappointments. In order for the stock market to keep advancing, it needs greater leadership from technology stocks and the NASDAQ.

Technology stocks have been rising commensurately with the stock market, but the NASDAQ Composite has lagged both the S&P 500 and the Dow Jones Industrials since the big breakout last December. Like I say, this defensive stock market advance needs a change in leadership in order for it to last.

The current recovery bull market has been running solid for four years straight. Stocks are very much due for a correction. My own view is that the stock market can keep ticking higher through first-quarter earnings season, then it will take a well-deserved break. With the substantial strength in the first two months of the year, it’s probable that it will be another up year, according to historical trends.

The stock market’s near-term derailment isn’t likely to come from the Federal Reserve or policymakers. The greatest risks this year are the financial problems in the eurozone and the potential for currency instability. Geopolitical risks like war are an ongoing threat of a potential shock.

So far, corporations are saying that business is pretty decent. I’m not referring to Main Street incomes—just what corporations are reporting.

Stock market leadership in the Dow Jones transportation stocks is a very significant development. The rest of the stock market won’t break down without this index doing so as well.

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