Why the Dow's Ignoring These Warning Signs

In what has become a common occurrence, the stock market is once again flirting with all-time record highs, with the Dow Jones Industrials (DJINDICES: ^DJI  ) up 42 points as of 10:55 a.m. EDT. Yet what's surprising about the rise is that it comes on the heels of some economic news that points to cracks in the bull market's armor. Today's reading of the Case-Shiller home price index showed gains of just 1% in May after seasonal adjustment, falling short of expectations. Consumer confidence figures fell more than expected in July despite upward revisions to the index's June figure. And given how important the consumer and housing sectors have been in the U.S. economy's recent recovery, any signs of weakness should have a bigger downward impact on stocks than they appear to be having today.

The big winner on the day is Cisco Systems (NASDAQ: CSCO  ) , up 2.3%. The company got a nice surprise when networking-security company Sourcefire (UNKNOWN: FIRE.DL  ) reported earnings last night, posting 29% year-over-year revenue growth and beating estimates for both top- and bottom-line growth. With Cisco having announced a week ago that it would buy Sourcefire for $2.7 billion, the news confirms Cisco's overall strategy of seeking out niche companies to acquire in order to create a more complete package of IT offerings for customers.

But energy stocks are losing out after BP (NYSE: BP  ) reported a lower quarterly profit due to weak world oil prices. The impact on the Dow's energy giants was minimal, with Chevron and ExxonMobil losing less than 0.6%, but BP has fallen almost 4% as investors seem to question whether the company will ever fully recover from the massive financial devastation that the Gulf oil spill wrought.

Finally, Herbalife (NYSE: HLF  ) has climbed 3.2% after announcing record second-quarter earnings and boosting its guidance for the remainder of the year. An 18% gain in sales produced 8% higher net income, and a big reduction in share counts boosted earnings per share even further. Predictably, Herbalife critic Bill Ackman questioned the results as his losses betting against the company soared, but for now, at least, the company seems to be doing exactly what bullish investor Carl Icahn had hoped it would do.

Cisco and Herbalife couldn't be more different in their business models, but both have done a great job of making the most of their respective profit opportunities. You should follow their example, as your best investing approach is to choose great companies and stick with them for the long term. The Motley Fool's free report "3 Stocks That Will Help You Retire Rich" names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.


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Comments from our Foolish Readers

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  • Report this Comment On July 30, 2013, at 11:27 AM, MKArch wrote:

    Dan,

    If you don't already follow Bob Johnson at M* you might want to read some of his recent weekly articles entitled "reading indicators". IMO he's one of the best economist out there. He went out on a limb early 2009 calling the turn around in the economy and has been pretty accurate since. He generally gets derided by the doom and gloom crowd as a pollyanna however he's turned cautious lately and seeing a worse than consensus GDP tomorrow that he thinks has a chance to actually be negative. He thinks a lot of the issues are one time or short term but as someone who has generally been on the optimistic side (and right) I pay attention when he turns cautious.

  • Report this Comment On July 30, 2013, at 7:52 PM, Khizhim wrote:

    To MKAarch:

    " Bob Johnson at M* " ? !

    Are you talking about Robert Johnson, who's Director of Economic Analysis at Morningstar, Inc.? Have you abbreviated "Morningstar" as "M*"? Gee...

    Morningstar offers an archive page of hyperlinked citations of his commentaries, in ascending chronological order, at:

    http://www.morningstar.com/articles/author/696-robert-johnso...

    Johnson's latest commentary was published this past Saturday, 7-27-13. He said, in part:

    ...I am feeling a little out of sync with my sense of caution. Consumer sentiment is at a new recovery high, summer cocktail parties are buzzing about improved home prices and for-sale homes selling in just a matter of days, and manufacturing data seems to have turned the corner. Plus, stock prices rise nearly every day despite higher interest rates, falling retail data, and stubbornly high oil and gas prices. I am not outright bearish on the economy, just queasy--and worried about market overconfidence...

  • Report this Comment On July 30, 2013, at 7:59 PM, MKArch wrote:

    Bingo, you've got it Khizim. IMO he's an outstanding read.

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Related Tickers

9/30/2014 4:38 PM
^DJI $17042.90 Down -28.32 -0.17%
DOW JONES INDUSTRI… CAPS Rating: No stars
BP $43.95 Down -0.59 -1.32%
BP p.l.c. (ADR) CAPS Rating: ****
CSCO $25.17 Up +0.24 +0.96%
Cisco Systems CAPS Rating: ****
FIRE.DL $0.00 Down +0.00 +0.00%
Sourcefire CAPS Rating: **
HLF $43.75 Up +0.76 +1.77%
Herbalife CAPS Rating: *

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