Dow Theory expects bull run for stocks will continue

By Adam Shell, USA TODAY

NEW YORK — It's getting harder for stock naysayers and non-believers to talk down, belittle or ignore the mushrooming bull market.

It seems like a foregone conclusion, but after gains for eight sessions in a row, climbing to levels not seen since October 2008 and hitting a bull market high, one of Wall Street's oldest trend-spotting tools has confirmed the primary trend of the blue-chip Dow and U.S. stock market is up.

Dow Theory, a forecasting system devised more than 100 years ago by Wall Street Journal editor Charles Dow, is back in the bullish camp.

The shift to the bull camp — after the Dow Jones industrial average has already climbed 65% from its March 9, 2009, bear market low — occurred this week when the Dow took out its previous bull market high attained on Jan. 19. The new high for the industrials follows a new high notched a week earlier by the Dow Jones transportation average — a key confirmation signal, according to the century-old Dow Theory.

"The weight of the evidence suggests the primary market trend is bullish," says Richard Moroney, editor of Dow Theory Forecasts. Moroney would rather have seen the market take more than an 8% drop from January highs. But the fact that all major U.S. indexes are trending higher and are at 17-month highs tilted him to the bullish corner. Thursday, he advised clients to trim their cash to 10% to 15%, from 25% in early March.

The premise of the Dow Theory is simple: If shares of industrial companies that make aluminum, computers, planes, farm equipment and soft drinks are hitting fresh highs at the same time as shares of the transportation companies that deliver those goods via planes, trains and trucks, it signals that the market's upward move is healthy.

"It's vital that more than one index shows similar signals in a close period of time," writes ChartAdvisor.com analysts Chad Langager and Casey Murphy on Investopedia. "It is a sign that business conditions are moving in the indicated direction. Thus, rising stock indexes signal a new uptrend."

A weakness of Dow Theory is that its followers can miss out on big gains, because by the time the market sends a clear signal that the trend has changed from down to up, the market has already posted sizable gains.

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