The Dow Jones Industrial Average closed Tuesday at a 52-week high, as did the Dow Jones Transportation Average. Dow theorists, who believe that a new high in one index must be confirmed by a new high in the other, see it as another sign we are in an up market. But does it mean anything? Dow theory: a primer The rules around the Dow Theory were formulated more than 120 years ago by Charles Dow himself (though he himself never used the term Dow Theory). The theory went like this: if revenues and profits for industrials (manufacturers) are rising, railroads that are shipping the goods must see rising activity as well. The two averages should move in the same direction, and if they don’t that is a warning sign. Those rules were formulated when the U.S. was primarily an industrial country. The Dow Jones Industrial Average really had only industrial stocks in it. The Dow Transports were then the Dow Railroads. That is no longer the case. The Dow Jones Industrial Average contains many companies that are not industrials. The Dow Transports now includes trucking and logistics companies, air freight stocks such as FedEx and UPS, and airlines, which certainly do not ship goods other than people. “Dow Theory was formulated when the Dow Industrials were stuff makers, and the railroads were stuff movers,” Tom McClellan, editor of the McClellan Market Report, told me. “We are not measuring what Charles Dow originally measured.” “We are now mostly a service economy,” McClellan said. New Dow Theory also confirms a new high There have been attempts to formulate a “New Dow Theory.” One that has been used by David Keller at Stockcharts.com looks at the new service economy, represented by the Nasdaq Composite, versus the old service economy, as represented by the S & P 500. “If both indexes are in uptrends, the market is strong,” Keller wrote in February. In February, Keller suggested that both indexes were moving up and called it a “bullish confirmation.” He also suggested a significant breakout would occur when the S & P 500 pushed above its August 2022 high around 4300, and the Nasdaq broke above its own August 2022 high around 13,000. That has indeed happened — in June. Tuesday, the S & P 500 closed at 4,554 (up 19% this year), and the Nasdaq closed at 14,354 (up 37% year-to-date). Keller readily admits that the tech resurgence has moved the S & P 500 as well as the Nasdaq, but tells me “As long as the two make new highs in concert, conditions are good.” “Sell in May and go away” hasn’t worked Another sign of a bullish uptrend: the old market adage to “sell in May and go away” has been an abject failure. “Sell in May and go away,” is the acknowledgement that the six-month period from May to October tends to underperform the six month period from November to April. It’s often a reliable indicator, but not so far this year. The S & P 500 is up 9% since May 1. For Jeff Hirsch, who has been watching these type of indicators for decades running the Stock Trader’s Almanac , there’s one unmistakable message. “All of this is a confirmation we are in a bull market,” he told me. “But it’s all a little late. We are due for a pause,” Hirsch told me. “Nothing substantial, we are talking [a] 5% to 10% summer correction and then back to new highs.” Why new highs? “It was the microprocessor in the 1980s and 1990s [that brought the markets to new highs], maybe AI is the equivalent that will take us to a new high,” he said. “The next flag is to clear the January 2022 historic highs,” Hirsch said.
