From Industrials to Technology—Stock
Market Leadership’s Bullish

investor sentimentThe Dow Jones Transportation Average has been a stock market leader since the March low set in 2009. A lot of the stocks within the index powered ahead over the last three years, especially railroad stocks, which have produced excellent corporate earnings. Now they’re all breaking down due to higher oil prices and the fact that they were due for a price correction. Without confirmation from this index, I don’t think the broader stock market can advance in a healthy manner this year. The index is therefore an important indicator to keep an eye on in these choppy market conditions.

Equities should keep bouncing around with no predictable trend until the end of March, and then the stock market will have another round of corporate earnings to digest. First-quarter earnings season can’t come quickly enough. This is a market that’s craving decent domestic news because of all the uncertainties from abroad. I definitely wouldn’t be making any big bets at this time. As we’ve seen from the trading action in the first week of March, investor sentiment is anything but stable. The market needs corporate earnings to settle its restlessness.

U.S.economic news is for the most part showing improvement. Policymakers have done everything they can to try to re-inflate the economy as a short-term goal. The Federal Reserve could not be more accommodative with its economic stimulus. All these policies, however, could prove to be detrimental to the long-run health of theU.S.economy. Sovereign debt, spending, interest rates, and money supply growth are issues that are going to have to be dealt with soon. Not doing so would likely create an entire new era of price inflation.

The stock market really hasn’t had any sort of correction since the beginning of the year and it’s a good possibility that the recent pullback is just that—a short-term correction. An upward trend can certainly resume if economic news doesn’t go negative and corporate earnings come in as expected. (See Stock Market: What We Need to Take it to the Next Level.) The stock market can still go higher this year, because it’s not expensively priced.

Expectations for corporate earnings in the first quarter of 2012 are staying pat. The large-cap technology sector is seeing some upward revisions to corporate earnings estimates and this is a positive development. In the industrial economy, expectations for corporate earnings this year are coming down a bit and that’s due to oil prices being over $100.00 a barrel.

Stock market leadership since the March low in 2009 has come from the industrial economy. At the beginning of this year, leadership transitioned to the technology sector. With better economic news and the current trend in corporate earnings expectations, the stock market has good potential over the next couple of quarters to keep its upward trend. This, while investment risk in equities continues to be very high.