We’re still in the early days of the stock market’s Q4 rally. That’s why it’s important not to overreact when prices pull back, as they did Tuesday.
(The Dow Industrial Average’s 50-point dip understated the market’s softness, with both the NASDAQ Composite and the S&P 500 Index closing down by a substantially greater percentage.)
Early in an advance, investors are prone to interpret every stumble as the Crack of Doom.
However, the weight of the technical evidence counsels us to give the benefit of the doubt to the bull—for now, anyway.
On Monday, the market completed an extraordinary two-week run. Over a 10-day period, the cumulative daily total of advancing NYSE stocks swamped decliners by a whopping 1.86 times. Technicians call such events a breadth stampede.
Readings above 1.85 are rare, and they almost never occur during true bear markets (the extended, torturous declines that every investor would love to avoid).
For example, there were no breadth stampedes (1.85X or higher) during the 2000-2002 bear, or the 2007-09 bear.
Obviously, I can’t guarantee the outcome this time. But the long history of this indicator — more than 60 years of reliable data –says we should assume the market’s primary trend is still up.
That doesn’t mean we have to be cockeyed Alfred E. Neuman (“what, me worry?”) optimists. One thing we’ll really need to see, if stocks are to move back up to their highs of the year, is a more definite improvement in junk-bond prices.
Lower-grade bonds are used to finance many corporate takeovers, which in turn create marginal demand for stocks. So a healthy junk-bond market is necessary, in today’s world, for a robust stock market.
On that score, the evidence is mixed. Take a peek at this chart for iShares iBOXX High Yield Corporate Bond Fund (HYG), the largest exchange-traded junk fund. The fund’s share price has lifted nicely off its October 2 intraday low, but remains below its September high.
The S&P 500, meanwhile, has surpassed its September peak. That type of divergence is bothersome. Stocks will be on much safer ground if HYG can jump back to $86.50 or higher before the end of October.
Until then, I advise you to buy stocks and equity mutual funds on significant pullbacks only. “Significant,” for this purpose, means the stock or fund in question has declined at least two days in a row (three would be even better).
Among the names already starting to look interesting: Barclays (BCS), Britain’s second-largest bank by assets. Under Chairman John McFarlane, a tough-talking Scotsman, BCS is shrinking its volatile investment-banking business and pouring resources into the company’s core competency: consumer and commercial banking.
While such transformations take time, I’m encouraged that Barclays has reached its capital-adequacy targets a year ahead of schedule. That suggests the bank may finally declare a hefty dividend increase in 2016, after three years stuck at the same rate.
I envision the payout doubling by 2020, accompanied by perhaps a 40%-60% jump in the share price. Current yield, based on the sum of the past four quarters’ dole: 2.4%.
Note that BCS typically issues three dividends of equal size in December, June and September, plus a larger disbursement, reflecting year-end results, in April.
