Dow Theory Suspense Builds as Stocks Near 1880s CrucibleMichael P. Regan
Technical analysts have any number of computer-driven tricks to attempt to read the tea leaves of the stock market, yet a theory developed by Charles Dow in 1884 still captivates them 130 years later.
Under his concept known as Dow Theory, transportation and industrial stocks must rally together in order to confirm that market gains will last and grow. Today’s advance sent the Dow Jones Transportation Average as high as 7,608.07, a record on a closing basis. The Dow Jones Industrial Average climbed as high as 16,565.73, just 11 points below its last record reached on Dec. 31.
Both measures pared gains after reaching those levels, heightening the suspense for Dow theorists waiting for the so-called “confirmation” signal that shows investor confidence in both the industrial and transportation companies.
Travel and shipping companies have beaten the industrials this year. Airlines like Delta Air Lines Inc., Alaska Air Group Inc., Southwest Airlines Co. and United Continental Holdings Inc. are up at least 23 percent on costs cuts and increasing economic bullishness. The Dow industrials have struggled to turn positive in 2014.
So in this case, it’s the industrials that need to step up their game for the Dow theorists to be impressed.
The Dow industrials need to close above a Dec. 31 record of 16,576.66 to corroborate the all-time high in transports reached last month, according to Richard Moroney, chief investment officer at Horizon Investment Services in Hammond, Indiana, and editor of the Dow Theory Forecasts and Upside newsletter. That would reconfirm what he sees as a bullish primary trend under the Dow Theory.
“We’d view a bull-market confirmation as one reason to stick with our nearly fully invested posture,” he said today in an interview by e-mail.
Here’s the downside, according to Moroney: Without new highs, a drop below the Feb. 3 closing lows of 15,372.80 in the industrials and 7,053.75 in the transports would represent a bear-market signal.
A lot has changed since Charles Dow came up with his theory and some may argue it is outdated, yet to many market technicians his words are just as relevant today:
“The revival of interest in industrial stocks is but the natural outcome of the prosperity in the industrial world,” Charles Dow wrote in his newspaper, the Wall Street Journal, in 1899, according to the book “Dow Theory Unplugged: Charles Dow’s Original Editorials & Their Relevance Today.”
Still, the interest in industrials then was nothing compared with the interest in railroad stocks of the day, which made industrial shares “open to all, and likely to lead to promiscuous buying for the first good turn in these stocks.”
It’s more than a century later and Dow’s disciples are once again looking for some promiscuous buying in industrial stocks.