Dow Theory Signal Indicates More Advances for Stocks: Technical Analysis
Yesterday’s close by the Dow Jones Industrial Average at a new high for the year suggests U.S. stocks will extend their advance, said Chuck Carlson, chief executive officer of Horizon Investment Services LLC.
The 30-stock average surpassed its previous 2010 high a day after the Dow Jones Transportation Average achieved the same milestone. Under Dow Theory, which stems from observations made by Wall Street Journal founder Charles Dow during the late 1800s, advances by both the transportation and the industrial average beyond their most recent peaks “confirm” that stocks can continue to rally.
Horizon Investment Services, based in Hammond, Indiana, uses Dow Theory to manage $160 million and is buying stocks to reduce the cash positions of equity funds it manages, Carlson said in an interview. In funds that can be invested entirely in stocks, cash positions will fall to about 15 percent from a range of 19 percent to 23 percent in response to the Dow Theory signal, he said.
“When you have those two above previous significant highs, it’s a bullish indication under Dow Theory,” Carlson said. “Any pullback in the market now, because you’ve had confirmed these new highs by the industrials and transports, we would view as a pullback within a bull market.”
The Dow average rose 26.41 points, or 0.2 percent, yesterday, to 11,215.13, its highest close since Sept. 19, 2008, after the Federal Reserve said it will buy as much as $600 billion of government bonds to aid the economic recovery. It gained 190.08 points, or 1.7 percent, to 11,405.21 at 1 p.m. in New York today, led by Caterpillar Inc., the world’s largest maker of construction equipment, and Bank of America Corp.
The Standard & Poor’s 500 Index, the main benchmark for American equities, has yet to close above its 2010 high of 1,217.28 on April 23. The index rose as much as 1.6 percent to 1,217.52 today as a 2 percent jump in the price of crude oil lifted energy producers and Qualcomm Inc., the biggest maker of mobile-phone chips, forecast profit and sales higher than the average analyst estimates.
After rebounding 71 percent from a 12-year low in March 2009, the Dow average fell as much as 14 percent from its April 26 closing level amid concern that U.S. unemployment near the highest since the 1980s and less spending by indebted European countries would hurt global growth.
To contact the reporter on this story: Elizabeth Stanton in New York at estanton@bloomberg.net
To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net
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