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Monthly Archives: June 2015


Transports have lagged the broad market so far this year, causing many to wonder if that signals an impending economic and market downturn. We do not think so, and our claim is supported by the historical data. As we discuss transports’ efficacy as a leading indicator (so called “Dow Theory”), we provide analysis showing that transports’ weakness in recent decades has actually been a better buy signal for the stock market than a sell signal, and we reiterate our positive view of the industry. While the situation in Greece is uncertain and very fluid, we do not expect a potential breakup of the Eurozone to cause a recession or bear market in the United States, and we would be looking for opportunities to buy transports stocks — or stocks in general — on significant weakness, should it occur.


Concern that weakness in transportation stocks (transports) might be a warning for the broader markets comes from Dow Theory, one of the oldest applications of technical analysis. First developed more than 100 years ago by Charles Dow, founder of The Wall Street Journal, and refined by others, Dow developed two averages to measure stock market performance that eventually became today’s Dow Jones Industrial and Transportation Averages. During the Industrial Revolution, these averages provided a good representationof the economy. Today, if you want confirmation of a trend reversal for the broad S&P 500 Index that gives you a more representative picture of the U.S. economy, you would not necessarily look to transports, which play a smaller role in the current more service-based and technology-driven U.S. economy than they did in Dow’s day. You might instead look to the Nasdaq Composite, which represents We do not believe transports’ weakness is a signal of an impending economic and market downturn. Historical data suggest transports’ underperformance may actually be signaling a buying opportunity for the S&P 500 rather than a sell. We believe transports present an attractive investment opportunity for the second half of 2015.

Debunking Dow Theory



Expect the bull market to continue through 2015. In the stock market, 2015 has felt like déjà vu. In 2014, the year began with a tough first quarter and finished strong. After a weak start to the year, we believe that corporate America will provide a much needed boost for the second half and 2015 may also finish strong — providing the seventh year of positive returns, in the 5 – 9% range we forecast. We remain confident in our 5 – 9% total return forecast for the S&P 500 for 2015, although reaching that target will require a power boost from corporate America. Our forecast is in-line with the long-term average range of a 7 – 9% annual gain for stocks, based on the S&P 500 Index, since WWII. Our forecast is based on expected mid-single-digit earnings per share (EPS) growth for S&P 500 companies, supported by improved global economic growth, stable profit margins, and share buybacks in 2015, with limited help from valuation expansion. The S&P 500 Index is on track to meet that forecast by year-end, having returned 3.5% year to date through the end of May 2015 (and 3.5% year to date through June 19, 2015). However, headwinds that emerged early in 2015 mean getting there will require fresh batteries to fuel a second half charge….

Batteries Not Included: Midyear Stock Market Outlook


2015 Midyear Outlook

The economy has delivered six consecutive calendar years of positive returns for stocks since the end of the 2008–2009 Great Recession, as measured by the S&P 500 Index; however, constructing a strategy for the remainder of the economic expansion will require a tricky assembly. Divergent monetary policies reveal an uneven global recovery that has triggered an uptick in stock market volatility. A few important pieces requiring assembly for the remainder of 2015 include…

2015 Midyear Outlook

Buying at Record Highs

The S&P 500 Index set several new all-time highs in 2015, with the most recent one coming on May 21, 2015. Each new record high, especially for an extended bull market,  begs investors to ask if the stock market is at its peak and poised to move lower. No one wants to buy at a top, watch price declines unfold, and wait an extended period just to recoup losses. How likely is that scenario? What exactly is the risk of buying at the top when there is an all-time high? We attempt to answer these questions. “Buy low, sell high” is one of the most recognizable stock market sayings. Investing when markets are at all-time highs would seem to fly directly in the face of this saying, leading many investors to believe that investing at all-time highs is a sure way to lose money. But is this really the case? Buying at an all-time high, especially several years into a bull market, can be unnerving. But looking at the odds that anygiven all-time high is followed by another all-time high within a certain time period can be reassuring. Analysis of the S&P 500 Index indicates that from the date of any given all-time high, the index has historically hit another all-time high within one month 91% of the time. Extending this time frame to three months increases those odds to over 97%, and extending to one year the odds approach 99%. Based on those odds, you have a very good chance of seeing another all-time high pretty soon after you buy on one….

Buying at Record Highs


ACA Ruling Could Make Healthcare Sector More Affordable

The upcoming Supreme Court decision regarding premium subsidies for the Affordable Care Act (ACA, aka Obamacare) may create a buying opportunity for the healthcare sector. We believe the odds favor the status quo (all subsidies legal regardless of the state), meaning that any selling pressure related to the risk of losing insured patients may present a buying opportunity. However, a court ruling in favor of the challenger (against the administration), which would likely be met witheven more selling pressure and remains a possibility, may create an even better entry point for the sector. Later this month, in the case of King v. Burwell, the Supreme Court will rule on whether ACA premium subsidies (via tax credits) are legal for individuals with Obamacare policies in states that chose to use federal health insurance exchanges rather than setting up their own state-run exchanges. When the law was written and subsequently passed in 2010, the hope in Washington was that all states would set up their own insurance exchanges for their citizens. Were this achieved, it would have eliminated the question of whether any subsidies that made insurance premiums more affordable were legal. The law is quite clear about the legality of premium subsidies in states with exchanges. However, the law is ambiguous aboutstates that opted not to set up exchanges, which is the crux of this case. Which way will it go? Our sources in Washington see 60% odds of the status quo (a ruling in favor of the administration), while we believe, based on the points below, that the odds may even be a bit higher. A favorable ruling for the administration could be based on three potential arguments:

1. The court may think the intent of the law and the broad context — including consideration for the conditions under which the law could reasonably function economically — are enough to essentially prove the IRS’s intention and uphold the status quo. The section of the law that allows for the federal government to set up an exchange if a state does not, points in this direction….

ACA Ruling Could Make Healthcare Sector More Affordable

Grading The Fed’s QE Program: Week 3

This week’s Weekly Economic Commentary is the third in a series looking back at the Federal Reserve’s (Fed) quantitative easing (QE) programs and evaluating how well they achieved their goals. Why grade the Fed now? Wehave just passed the six-month mark from the last purchase of QE3, which began in September 2012 and ended in October 2014. Also this time of year, colleges, universities, and high schools pass out report cards and hand out diplomas. In the week ahead (June 1 – 5, 2015), we’ll hear from all four major central banks that have enacted QE: The European Central Bank (ECB), which meets on Wednesday, June 3, 2015. The Bank of England (BOE), which meets on Thursday, June 4, 2015. The Bank of Japan (BOJ), as the governer of the BOJ delivers a key policy speech on Wednesday, June 3, 2015. The Fed itself, with the release of it Beige Book — a qualitative assessment of economic, business and banking conditions in each of the 12 regional Feddistricts — on Wednesday, June 3, 2015, ahead of the next Federal Open Market Committee (FOMC) meeting on June 16 – 17, 2015 Having already graded the Fed on financial stress and its dual mandate, we’ll grade the Fed’s QE program on how it impacted financial markets, one of the Fed’s key transmission mechanisms to achieve its dual mandate. This week we are looking at domestic stock and bond market performance, and will grade the Fed on the other asset classes in a future commentary.

Grading the Feds QE Wk 3