A 100-Year-Old Stock Market Indicator Shows Bull Market Remains on Solid Footing

A century-old stock market indicator, known as the Dow Theory, has issued a bullish signal this week for the first time in over a year. The Dow Theory flashed a buy signal when both the Dow Jones Industrial Average and the Dow Jones Transportation Average reached record highs on Tuesday. This trend could suggest that the bull market, which started in late 2022, remains firmly intact.

On Tuesday, the Dow industrials reached its first new high since 5 January, while the Dow transports had not hit a fresh record high for a much longer period prior to this week. Ralph Acampora, co-founder of the CMT Association, explained, ‘It confirms that the secular bull market is alive and well.’

Despite recent struggles in the AI sector, US stocks have experienced a rotation that has affected different segments of the market. Over the past two months, momentum slowed for some top megacap US tech stocks, such as Nvidia and Broadcom, but this shift has benefited value stocks and shares of smaller companies included in small- and mid-cap indices. Notably, transportation stocks have gained from this market dynamic, according to Acampora.

Overall, investor sentiment remains optimistic about the US economy. Craig Johnson of Piper Sandler noted that with the Federal Reserve expected to cut interest rates and analysts forecasting broad-based earnings growth, stocks that missed out on the recent AI rally still have considerable room for growth this year. ‘I think there’s no question the economy is moving in the right direction,’ Johnson said.

In addition to the bullish signal from the Dow Theory, the S&P 400 midcap index also reached its first record closing high since 11 December on Tuesday, further indicating positive momentum across market segments.

What is the Dow Theory?

In straightforward terms, the Dow Theory is based on the premise that the Dow Jones Industrial and Transportation averages have a symbiotic relationship, reflecting the health of the economy. The transportation index focuses on companies that facilitate the movement of goods and people across the country. Developed by Charles Dow—the creator of the Dow indexes and co-founder of Dow Jones & Co.—the theory suggests that when both averages reach new highs, it signals a strong bull market.

A bullish signal under the Dow Theory occurs when both averages confirm a new high. These highs do not necessarily need to be achieved on the same day but should occur in close succession. While the composition of these indices has evolved significantly since the theory was first devised over a century ago, the underlying principles remain relevant.

Over the years, the Dow industrials have incorporated shares of financial services and technology firms alongside traditional industrial companies. Similarly, the transportation average now includes companies like Uber Technologies and Avis Budget Group, which were not part of the original railroads and shipping firms. According to Acampora, the fundamental logic behind the indicator still holds true despite these changes. When Charles Dow developed the transportation index in the late 19th century, it was known as the Dow Jones Railroad Average. Today, it encompasses a broader range of companies involved in logistics, airlines, shipping, and delivery services, such as FedEx and United Parcel Service.

Acampora emphasised that although the components have changed, the core idea remains valid: When Dow developed the transportation average, it was meant to reflect the movement of goods and people. That core concept still applies today, even if the specific companies have evolved.

Overall, the recent record highs in both the Dow industrials and transports suggest that the long-term upward trend remains intact, reinforcing investor confidence that the bull market has considerable momentum behind it.

Disclaimer: Our digital media content is for informational purposes only and not investment advice. Please conduct your own analysis or seek professional advice before investing. Remember, investments are subject to market risks and past performance doesn’t indicate future returns.