Dow Industrials, Transports Top Highs in Bullish Sign

(Bloomberg) -- The Dow Jones Industrial Average and the Dow Jones Transportation Average rose to their highest levels of the year, a bullish sign for the U.S. stock market among traders who use charts to make forecasts.“Any time the two averages go into new-high territory, it’s bullish,” said Richard Russell, the 85-year-old publisher of Dow Theory Letters in La Jolla, California. “It says, ‘If you’re in the market, you’re in the right place.’”

The 30-stock industrial average rallied 113.81 points, or 1.2 percent, to 9,370.07, exceeding its previous 2009 high of 9,320.19 on Aug. 4. New York-based American Express Co. helped lead the advance after Goldman Sachs Group Inc. increased its share-price forecast for the biggest credit card company by purchases to $33 from $28.The 20-stock transportation average climbed 4 percent to 3,749.33, surpassing its Jan. 6 close at 3,717.26. CSX Corp., based in Jacksonville, Florida, helped led the measure higher after the third-largest U.S. railroad was upgraded to “outperform” from “neutral” by Credit Suisse Group AG.The Standard & Poor’s 500 Index, a broader benchmark for U.S. equities, also rose to a 2009 high, climbing 1.3 percent to 1,010.47. A government report showing the pace of job cuts slowed in July more than economists estimated ignited the rally.

Confirming Each Other

Dow Theory, developed by Wall Street Journal co-founder Charles Dow in 1884, holds that moves by the industrial average must be “confirmed” by the transportation average in order to be sustained. Dow Theory is a version of technical analysis, the study of charts patterns to predict prices. Russell began publishing Dow Theory Letters, a newsletter that comes out every three weeks, in 1958.The most recent signal given by Dow Theory occurred on July 23 when the industrial average first exceeded its January high and the transportation average broke above its highest levels of May and June, Russell said.
Today’s development “tells us the secondary trend is up,” Russell said.

U.S. stocks may still be in a bear market, Russell said. The Dow industrial average was down as much as 25 percent this year, on March 9, following a 34 percent drop last year that was its biggest annual drop since 1931. It’s normal for markets to give back one-third to two-thirds of any gain or decline before resuming their previous direction, Russell said. The Dow average has retraced about a third of its 54 percent decline from October 2007 through March 9.
“We don’t know whether this is just a correction of a previous decline, or a new bull market,” Russell said. “I think it’s just a correction.” Richard Moroney, the Chicago-based editor of Dow Theory Forecasts, said stocks are at risk of plunging below their March lows until the Dow averages lose at least one-third of their gains since March and then rebound to new highs.“That would be a bull-market signal,” he said. “All we’ve seen is a very vigorous rally after a big decline. Maybe March 9 was the low, but we’d like to see proof.”