Dow Theory Sees Bull Market Signal

The long-awaited Dow Theory bull market signal finally arrived yesterday. This came about as a result of the Dow Jones Industrial Average and the Dow Jones Transportation Average both breaking through their previous rally peaks (registered on 12 and 11 June respectively).

The charts are shown below.

Source: StockCharts.com

Source: StockCharts.com

Although the breakouts provide confirmation of the nascent uptrends, one may question the relevance of the Averages as representative benchmarks in the modern economy. Also, most indices are quite overbought after very sharp moves over the last 12 days.

In my opinion, it could be dangerous to blindly put one’s faith only in Dow Theory and investors should at all times rather base their decisions on a combination of fundamental and technical indicators.

While Dow Theorists delight in the bull signal, it is appropriate not to lose sight of the economic picture, as aptly summarized by David Rosenberg, chief economist and strategist of Gluskin Sheff & Associates:

“Well, the S&P 500 surged 15% in the second quarter and what we did was go back in the history books to see what happens to the economy the very next quarter typically after such a big bounce and the answer is … just over 3% real GDP growth. So consider that de facto what is being discounted at this time for current quarter growth - it better be a humdinger of an inventory build.

“Now, for the market to build on such a rapid advance in the current quarter, history again suggests that we would need to see 5.5% real GDP growth, which we give near-zero odds of occurring. Hence our call for a sputtering stock market through year end. Too much growth - and hope - are priced in at this point.”

Richard Russell, “Mr Dow Theory” and author of the Dow Theory Letters, yesterday replaced the bear on the first page of his daily newsletter with a long-horned Texas bull. “We follow the Averages blindly (via Dow Theory) the way a blind man follows his seeing-eye dog,” the long-timer added tersely.

We live in interesting times indeed!

Comments

[AndrewBaker:]

Keep bidding it higher, 'cos when it eventually falls, I'll make even more on the short side. Shame is, all those people suckered into buying at the top will lose so much, and they will be the small invetsors who really can't afford it. But the manipulators don't care, just as long as they get theirs. And that includes the politicans who profess to be there to help and save us all: I'd rather be saved by a big ugly gorilla. At least I know he is what is shows himself to be.

Jul 24 03:28 PM

[Swashbuckler:]

Government intervention in the markets in the past year has changed the dynamics of the game so radically that I doubt Dow Theory has any more predictive value than lunar cycles or crystal balls. Assuming there was ever any legitimacy to Dow Theory to begin with. The average investor will probably be better off either fading the CNBC shills or remaining in cash.

Jul 24 03:52 PM

[whidbey:]

Suppose it is a new bull, where is it going? I suspect no where, this is a fake out by the dear old DT.

The technical data say the market is headed up on light volume in the summer and will likely correct hard in the fall months. That makes it a trading rally but not an investment proposition.

Anything is apparently news anymore, even bull ----.

Jul 24 04:23 PM

[untrusting ...:]

Exactly right. Between massive government intervention and GS and HFT manipulating the market higher, one cannot rely on an indicator like Dow Theory. You might be able to trade this market and make some money, but you sure better be ready to get out in a hurry. Fundamentals such as massive government debt, looming higher interest rates, poor sales, high PE's, reduced consumer spending, devestated state and municipal revenues, looming higher taxes, wealth destruction, hugh credit card/commercial RE losses, and dozens of other negative influences will eventually counteract all the government and PPT efforts. The market cannot ignore reality forever, despite massive GS and government efforts to the contrary.


On Jul 24 03:52 PM Swashbuckler wrote:

> Government intervention in the markets in the past year has changed
> the dynamics of the game so radically that I doubt Dow Theory has
> any more predictive value than lunar cycles or crystal balls. Assuming
> there was ever any legitimacy to Dow Theory to begin with. The average
> investor will probably be better off either fading the CNBC shills
> or remaining in cash.

Jul 24 05:10 PM

[enigmaman:]

The recent stock market rally started when investors realized " We would not fall into the abyss", then the market started to run up based on very bad financial reports that could have been worse, it continued its run based on companies ability to post profits and survive without increasing sales revenues and through drastic cost cutting measures, and now they may have run into a wall, we could be at the markets tipping point, with the market considered fully valued, where to from here, the market may retest recent lows if investors continue to believe this will be a jobless recovery, which means companies will only be profitable if they continue to rob Peter to pay Paul, that being the case investors will want to lock in recent remarkable gains as they run for the exit door. Cannibalizing, feeding off yourself to survive can only last so long

Jul 25 07:48 AM

[enigmaman:]

Forget about fundamentals, technicals and Dow theory because the entire stock market rises and falls based on human psychology. The market going forward will depend on the same old GREED and FEAR will institutional investors want to lock in their recent remarkable gains or swing for the fences and double down, all in. IMHO I think we will see a gradual unwinding of their positions that will accelerate with time as the good news, good feelings start to wain, I mean how long can the market rise based on Companies feeding on themselves to post profits

Jul 25 07:57 AM

[Doctor Chaos:]

i HATE to repeat myself but in this case i have to ... THERE IS NO VALID THEORY, MEASURE OR TECHNICAL ANALYSIS WHICH CAN PREDICT FUTURE TRENDS BASED ON PREVIOUS EVENTS ... it's flawed mathematics and it deeply relies on the premise that someone knows the S0 of the current event ..... and also, what these so called analyst don't tell you,is that ALL technical analysis goes into domain of deterministic chaos, not in the domain of factuality or predictability .... and i can't believe the amount of media exposure this financial. Also there is no way to extrapolate the fractal of an event, if ALL the parameters of the events S0 are no known ... and they CAN never be known because the S0 is an ad infinitum derivative .... please don't listen to these so called analyst because they know as much as the next guy ... they just took reading tea leafs and coffee beans to the next level .. if you want an empirical proof,just look at their score " predicting " quarterly results for this quarter ... oh and also ... i'm amazed with the level of how stupid and blatantly moronic all this " authors " are .... Dr. Chaos

Jul 25 09:51 AM

[RTF 360:]

Reparations don't have to come with 40 acres and a mule.
21st Century reparations can just keep giving and giving via nationalized health care.

When Obama takes all the Boomer health care benefits and gives them to his supporters it will not only be "eugenics" it will be good strategic politics. He doesn't want the Boomer vote , he wants the Boomers dead and off Social Security and health care.

There is a reason the stock market is going up.
When those corporations don't have to pay for health care because it was nationalized , all the money goes straight to the bottom line as pure {& completely unforeseen}profit .

Jul 25 11:03 AM

[enigmaman:]

Ok DR. Chaos, so in plain English- A variance of any sort, when applied to any theory will cause a different outcome, the result could be radically different or slightly, but a different outcome just the same. So when a so called analysis says "all things being equal", "based on historical numbers", " based on the past twenty year history" they have already cast doubt on their conclusion because there is never a time when all things are exactly as they were before.

Its my opinion one would get better market results studying psychology because the human factor is the linchpin that will drive fundamental or technical analysis, its the wild card that is the cause of the chaos in the market place. Since the masses act like sheep best read up on how to be a shepherd

Jul 25 11:52 AM

[Doctor Chaos:]

exactly ... when i explain this to other people i use the watermelon analogy .... lets say you drop 100 watermelons from the same building .... you know they gonna fall because gravity is a constant of a probability which is so close to 1 that is regarded as a certainty .... but what you dont know is where it will fall, what the pattern will be once it falls ... you can only control the watermelon and the building from which you're dropping it ... what you can not control is the air resistance, humidity percentage, will their be wind or not etc ... so its the same things like charting, but you don't even know how tall the building is ... you only know you have a watermelon ....


On Jul 25 11:52 AM enigmaman wrote:

> Ok DR. Chaos, so in plain English- A variance of any sort, when applied
> to any theory will cause a different outcome, the result could be
> radically different or slightly, but a different outcome just the
> same. So when a so called analysis says "all things being equal",
> "based on historical numbers", " based on the past twenty year history"
> they have already cast doubt on their conclusion because there is
> never a time when all things are exactly as they were before. <br/>
>
> Its my opinion one would get better market results studying psychology
> because the human factor is the linchpin that will drive fundamental
> or technical analysis, its the wild card that is the cause of the
> chaos in the market place. Since the masses act like sheep best read
> up on how to be a shepherd

Jul 25 12:30 PM