Just a few months ago, there was a lot of concern that “Dow Theory” was signalling an impending stock market sell-off.
In brief, the “Dow Theory” says that Dow Jones Industrial Average and Dow Transportation Average dictate which way the rest of the market will move. But they must be moving in tandem to draw any conclusions about market conditions. If one is making a new high, while the other is not doing well, you should be sceptical of the durability of the rally.
Last fall, while industrial stocks had surged higher, transportation stocks (aka “trannies”) had collapsed.
But since the end of December, trannies have surged +10 per cent, while the Dow is up about +6 per cent. Here’s the chart for trannies:
As a result, Dow Theorists are now saying a buy signal has been triggered:
“The Dow Jones Industrial Average hit a new bull market high Friday of 13649 (and is currently adding to that), surpassing its fall peak and joining the Dow Jones Transportation Index (which is at all-time high territory at 5739) in sending a clearly bullish sign to the market,” WSJ.com’s Paul Vigna writes.
Forex.com editors believe that even if the signal was not triggered Friday, it could still be coming soon:
Presently, the Dow Industrial average is above its previous Q1 2012 highs, yet it still remains below the prior highs from September/October around 13,660/65. While this does not guarantee that equities will continue to move higher over the coming days and weeks (since the Industrials can still falter and make a lower high), it does project a rather bullish signal.
For what it’s worth, the godfather of Dow Theory, perma-bear Richard Russell, believes we are not close to the “buy” threshhold, according to Marketwatch’s Mark Hulbert:
Russell, who is editor of Dow Theory Letters, argued over this past weekend that the Dow industrials must close at a new all-time high above 14,164.53 to confirm the Dow transports — not at just a new bull market high.
These conflicting opinions show that Dow Theory is as much an art as it is a science.