Dow Theory Points to New Cyclical Bull Market

Includes: DIA, QQQ, SPY
by: FP Trading Desk

With the Dow Industrials breaking above the highs of early June and the Transports following suit on Thursday, this action confirms a new uptrend by establishing a paid of higher highs and higher lows since early March.

That the take from RBC Capital Markets technical analyst Ray Hanson, who told clients that in the annals of Dow Theory, “this kind of action has signaled the start of a new ‘cyclical’ bull market.”

So while it is unknown how long the new uptrend will last and how high it will reach, the amount of momentum already in the market does tilt the odds strongly in favor of higher levels before a new Dow Theory ‘sell’ signal can form, according to Mr. Hanson.

How high might the rally go?

The analyst said the next resistance level for the S&P/TSX composite index is 10,726 (ended the week at 10,687), followed by a range of 11,700 to 11,800. For the S&P 500, resistance comes at 1,007 (ended the week at 979), then 1,044.

Mr. Hanson noted that at 1,044, the S&P would be up 57% from the March lows – pretty close to the 53% advance in the first major up-leg of the 1975-1976 cyclical bull market, “a cycle to which many have compared the recent advance.”

The analyst also said it is worth noting that after completing the first up-leg in 1975, the S&P retraced 40% of it prior to starting the next (and final) up-leg.

“We expect that there will be more and more rapid sector rotation and increasing emphasis on individual stock selection over the next several months,” Mr. Hanson said. “In line with what we’ve experienced in recent weeks, global economic growth themes seem likely to dominate during rally segments, and traditional ‘defensive’ themes during periods of pullback or retracement.”

In Canada, that means leadership will likely continue to come from Materials, with some rotation among Metals, Energy and Golds. In the U.S., upside leadership is expected to be biased toward Industrial Cyclics and Technology.