Follow the Dow Transports for Near-term Direction

Everything needs a break now—stock prices and commodity prices. We’ve had a great run and a correction or period of consolidation would be a very healthy development for equity and commodity markets. The 2010 fourth-quarter earnings season is just about over and we’re in for a lull. Accordingly, markets will trade off economic and geopolitical news, which, as we all know, isn’t quite a rosy as what big corporations are saying. Follow the Dow Jones Transportation Index if you want to know where the rest of the market is going over the near term.Everything needs a break now—stock prices and commodity prices. We’ve had a great run and a correction or period of consolidation would be a very healthy development for equity and commodity markets. The 2010 fourth-quarter earnings season is just about over and we’re in for a lull. Accordingly, markets will trade off economic and geopolitical news, which, as we all know, isn’t quite a rosy as what big corporations are saying.

The medium-term upward trend in corporate earnings and share prices remains intact as far as I’m concerned. The year 2011 could be a very good year for equities. Given the trading action over the last six months, however, there’s no need to load up on anything. Like I say, everything needs a break right now.

The Dow Jones Transportation Index abruptly broke down just recently and this is a sign that the stock market is tired—it’s tired of going up. Some big commodity-related companies in agriculture and precious metals have also broken down, so I think it’s fair to conclude that we are now in a period of consolidation. I would be very surprised if equity prices all of a sudden reaccelerated. The economic news just isn’t good enough for that.

I wouldn’t mind a major stock market correction. It would present a much-needed new entry point for new positions. I would consider just buying the market if we got a pronounced pullback in share prices. I’d also do the same with gold and silver, but because of geopolitical uncertainty, I don’t think these commodities are going to experience much in the way of a correction—even though they could use one.

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Now is a great time to be researching new stock market opportunities. Pulling the trigger on a bunch of new long positions doesn’t seem wise just yet. A number of large-cap companies continue to look great in this market and many are trading right at their 52-week highs for the year. These kinds of stocks, like Caterpillar Inc. (NYSE/CAT) and DuPont (NYSE/DD), can keep holding up, but the important leadership going forward is from the Transports. Follow the Dow Jones Transportation Index if you want to know where the rest of the market is going over the near term.

Everyone is worried about higher oil prices derailing the economy. The spot price of copper is pulling back now because of the same worry. From my perspective, the high-commodity/low-economy argument isn’t going to become a reality unless the geopolitical situation in the Middle East and North Africa were to get really out of control. We’re still in a bear market rally, but I’m confident that the right shoulder of the S&P 500 Index will get formed.