A lot of stocks are rolling over, breaking their 50- and 200-day simple moving averages (MAs). This is a tired market that could very well consolidate or correct right into the fourth quarter.
And the economic data has been softer, as well. Throw in geopolitical tensions with Russia and we have the makings of a material price retrenchment.
There’s still resilience, however, in some of the most important stock market indices. Stocks composing the Dow Jones Transportation Average are holding up extremely well, especially compared to the Russell 2000, the NASDAQ Biotechnology index, and the NASDAQ Composite index itself.
While the main market indices are mostly flat on the year, I don’t think investors can expect any capital gains until perhaps the fourth quarter.
From my perspective, relative price strength in the Dow Jones industrials, transportation stocks, and most of the S&P 500 index means that the longer-run uptrend remains intact.
With speculative fervor still coming out of initial public offerings (IPOs) and select biotechnology stocks, this action is an indicator of a tired market that’s long in the tooth, as investors are clearly less willing to speculate on those stocks that don’t offer income or relative safety in their earnings.
Risk aversion won’t kill a secular bull market. But it does mean that risk-capital opportunities are a lot less plentiful. Currently, among speculative stocks, one of the only sectors still experiencing decent price action is oil and gas drilling and exploration.
This is still a market that I think favors existing winners—blue chips, in particular.
These are the stocks to be buying (if you’re buying at all), because they offer dividend income on top of high single-digit earnings growth and strong underlying balance sheets. As evidenced by the price action of many Dow Jones industrials, this is what institutional investors have been doing.
The stock market is at an all-time high on mediocre economic growth. If the global economy, and the U.S., in particular, can accelerate going into 2015, this will immediately translate into blue chip earnings.
If things stay soft or weaken, then dividend income is the only way for equity investors to try to keep up to the rate of inflation. And because balance sheets are strong, the prospects for rising dividends remain positive.
In any case, some of the market’s existing winners that I like in a slow-growth environment include The Walt Disney Company (DIS), Johnson & Johnson (JNJ), Union Pacific Corporation (UNP), 3M Company (MMM), and PepsiCo, Inc. (PEP), to name a few.
Stocks experienced their breakout last year, and 2014 is seemingly all about digesting the gains.
The breakout occurred in blue chips, and then it branched out to more speculative stocks. Now the market is much less willing to bid the highest valuation issues; at the end of the day, it’s a positive development for the longer-run trend.
Practically, there are not a lot of reasons to be buying stocks at their highs. But equity investors do have money that needs to be put to work. In my mind, new money needs to be with the safest names. Capital preservation is now paramount.
Disclaimer: There is no magic formula to getting rich. Success in investment vehicles with the best prospects for price appreciation can only be achieved through proper and rigorous research and analysis. The opinions in this e-newsletter are just that, opinions of the authors. Information contained herein, while believed to be correct, is not guaranteed as accurate. Warning: Investing often involves high risks and you can lose a lot of money. Please do not invest with money you cannot afford to lose.