So far, 1998 has been a year of surprising progress for the stock market. After stellar returns in 1995, 1996 and 1997, and with Asian economies collapsing and corporate profit growth slowing, most Wall Street experts were predicting 1998 would be a tough year for stocks. As it turns out, 1998 has been another tough year for the skeptics.
The easiest way to be wrong about stocks is to bet against a bull market. Dow Theory Forecasts newsletter has not made that mistake. It's been bullish since January 1991, and it intends to remain bullish until the Dow Theory flashes a bear-market signal.DTF subscribers made considerable progress over the past six- and 12-month periods. The Dow Industrials have rallied 15.9 percent over the past year and 13 percent since year-end 1997. The DTF Focus List - the newsletter's top picks for one- to three-year capital gains - has advanced 21 percent over the past year and 13.2 percent since year-end 1997.
The Dow Jones averages have a subtlety not shared by many of today's Wall Street forecasters, notes DTF.
"The averages are not talking all the time. But when they do talk, it pays to listen."
Investors following the Dow Theory avoided the 1929 crash and largely sidestepped the bear markets of 1937, 1946, 1959-60, 1966 and 1973-74. In 1987, the theory generated a bear-market signal on Oct. 16 - a prescient call, but one that gave investors little chance to sell before the October 19 crash.
What is the Dow Theory saying now?
Bull markets have three phases, explains Dow Theory Forecasts newsletter.
"In the first, stocks rebound from depressed conditions. In Phase 2, stocks advance because of improving business conditions. During the speculative third phase, stocks begin to reflect future possibilities as well as present values."
Distinguishing between phases two and three is not easy, says DTF. Probably the best indication of speculation is the degree to which stocks are rising simply because they've been rising. The S&P 500 Index's record price-to-earnings ratio of 29, the craze in Internet stocks, and the surge in merger activity could also be warning signs of overspeculation.
Before you place your sell orders, however, remember two things, cautions DTF.
"First, many of the same cautionary arguments could have been made in 1996, right before the Dow surged 23 percent in 1997 and 13 percent in the first half of 1998. Second, the speculative third phase is often the most profitable stage of any bull market. While it is useful to know if a bull is young or aged, selling before the Dow Theory provides a bear-market signal is often a big mistake. In our view, a final speculative surge in the stock market remains very possible."
Here are DTF's 10 favorite stocks for that final surge: Abbott Laboratories, Air Products & Chemicals, Comdisco, Crane, ECI Telecom, FDX, Harcourt General, Mylan Laboratories, Pittston Brink's, Southwest Airlines.
(Dow Theory Forecasts, 7412 Calumet Ave., Hammond, IN 46324; weekly, $233 annually)