Top Picks 2017: Dow and S&P ETFs

01/27/2017 6:00 am EST

Focus: STOCKS

Matthew Kerkhoff

Editor, Dow Theory Letters

The stock market is in a primary bull market. This is based on the Dow Theory, the Richard Russell Primary Trend Index (PTI) and other reliable stock market indicators, explain Matt Kerkhoff in Dow Theory Letters.

Richard Russell –- editor of Dow Theory Letters from 1948 until his passing in 2015 -- wasn't just a student of the markets, he was a student of human behavior.

He knew that "Mr. Market" had a personality, and tendencies to behave in strange and unusual ways. Part of that philosophy entailed the three stages of primary bull markets.

The first stage is the accumulation stage; this is the phase when so-called “smart money” begins to accumulate stocks.

This stage is marked by pessimism, and is generally a period when the majority of the public is out of stocks.

The second stage of a bull market is often the longest, and this period is marked by improving business conditions and increased valuations.

Earnings continue to rise and confidence begins to mend, as the scars from the previous bear market fade. Participation in the market increases as investors come off the sidelines.

The third and final phase is marked by excessive speculation, confidence and valuations at extraordinary levels, and it seems to fit the market here.

Richard Russell often called this the third “sentiment” phase because that’s really what it is -– a market driven by feelings rather than fundamentals.

A good way to play this is by buying the SPDR Dow Jones Industrial Average ETF (DIA), which tracks the Dow Industrials. We add that the SPDR S&P 500 ETF Trust (SPY) would be a good bet as well.

The 3rd phase of a bull market can be very profitable, but we must also remember that it is the final leg. This means our participation should be offset by a healthy dose of pessimism as the market moves higher.

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