Gains

Q: Why do you still have so much of your Buy List in bonds despite the market’s big rally over the last few months? Aren’t you missing out on gains?

A: The most recent signal from the Dow Theory was bearish. And while the broad market is definitely trending higher, mostly on the strength of huge growth stocks, the Dow Transports’ inability to reach significant highs suggests that the cyclical portion of the market isn’t sharing the wealth.

We are not shying away from the market’s growth engines. But at the same time, long history suggests that cyclicals’ lack of participation warrants a bit of conservatism. We hope to add new stocks to the Buy List as opportunities develop in coming weeks, but for now we intend to hold some money on the sidelines.

Admittedly, the divergence between the Industrials and the Transports has us a bit concerned that the Dow Theory may have emitted a false bear signal. That does happen, though not very often. For now, however, we’re holding back some cash until the Transports sort themselves out. Taking cues from the Dow Theory has benefitted our returns over the years, even though such signals often seemed contrarian. Since we began recommending a bond position, our Focus List returns including that position have outpaced the returns of a fully invested list.

Of course, we hear from many readers who follow our stock picks but not our bond-fund recommendations. It’s your money, and if you’d rather commit a larger portion of it to equities than we currently advise, feel free to do so.

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