Third-quarter earnings season continues this week; with a number of companies set to report in the next few days, the stock market’s attention should finally be on corporate earnings. And while earnings expectations are being reduced, the positive disposition to the Dow Jones Transportation Average remains.
The index has trended higher compared to many blue chips, which have been in consolidation for some time now. Many component companies of the index are trading at or near their 52-week highs.
With this trend, there is still some resilience to this stock market, even with a backdrop of reduced earnings outlooks.
What is noteworthy in this regard is the NASDAQ Composite Index, which remains right at its 52-week high and is creeping closer to its all-time record high set in 2000. Countless technology and biotechnology stocks continue to push to new highs. It’s a near-term bullish stock market indicator in an environment of declining expectations.
And declining expectations are why the action in the NASDAQ is so worrisome. The stock market’s been stretched for some time now, with previous leadership from blue chips and small-cap companies. The recent outperformance in the NASDAQ Composite—the component companies of which are far more risky than blue chips—is itself a telling indicator.
But while the stock market has been due for a correction for months now, the action in the Dow Jones transportation stocks, as well as the technology sector, is evidence of the continued resilience in equities.
Recognizing that there are very few instances of optimal buying opportunities in this stock market, I’m still very reticent to be a buyer in a market that’s nearing its all-time high on what is looking to be anemic earnings growth.
There’s nothing wrong with building cash positions at this time.
Of course, secure dividend-paying securities are still going to be in demand in a stock market that’s actually starved of genuine economic growth.
For investors considering new positions in this stock market, I’m a fan of sticking with existing winners. These are blue chip dividend-paying stocks like Johnson & Johnson (JNJ), The Procter & Gamble Company (PG), PepsiCo, Inc. (PEP), and The Walt Disney Company. (DIS)—all large, brand-name companies that have meaningful dividend yields and aren’t overly stretched in terms of valuation. (See “Who the Stock Market Leaders Will Be This Earnings Season.”)
I’m also a fan of domestic energy and storage stocks, select restaurant stocks, and select transportation companies.
But the reality is that economic conditions slowed in the third quarter and financial results should reflect this. There’s no urgency to buy this stock market. I expect the market to sell off shortly.