Dow Theory Bullish


With the Dow Jones Industrial and Transportation averages eclipsing previous significant highs, the primary trend of the market is bullish, according to the Dow Theory. As a result, the Forecasts is increasing its recommended equity exposure to 85% to 88% of portfolios, with the remainder in Vanguard Short-Term Investment-Grade ($10.62; VFSTX), a short-term bond fund.

Industrials confirm Transports

The Forecasts has been stating for weeks that the market has traced a fairly clear path in terms of the Dow Theory. Closes in the Industrials and Transports above their late-October highs of 12,231.11 and 5,025.09, respectively, would be bullish.

On Thursday, Dec. 22, the Dow Transports eclipsed their Oct. 27 high to close at 5,030.31. The Industrials confirmed the Transports' new highs on Friday, Dec. 23, when they topped their Oct. 28 high to close at 12,294.00. The new highs in the Dow Transports and Industrials have triggered a bullish signal.

This bullish development comes amid widespread skepticism as to what 2012 holds for stocks. Worries about Europe, a particularly contentious election cycle, and an economy that still isn't hitting on all cylinders are just three reasons many on Wall Street predict a rough year for stocks in 2012.

However, history shows that strong market moves often spring from such skepticism, so the Dow Theory's recent bullish indication seems well-timed.

To be sure, a bullish signal under the Dow Theory does not always translate into an immediate rally in stocks. In fact, it is not unusual for stocks to pull back following a Dow Theory bullish indication, as stocks may require a breather after exerting a lot of energy to surpass previous highs. The good news is that with the primary trend bullish, market dips are more likely to represent solid buying opportunities.

One development that would buttress the Dow Theory's bullish indication is a new significant high in the S&P 500 Index. While the S&P 500 plays no part in classical Dow Theory analysis, the S&P 500 does represent an important segment of the market and is widely followed by investors. Given that the strongest bull markets are typically broad-based, a close above 1285.09 on the S&P 500 Index would reinforce the recent bullish developments under the Dow Theory.

Because of the Dow Theory's bullish indication and the availability of attractively valued stocks, the Forecasts is raising its equity exposure to 85% to 88% of portfolios. For new buying, Aetna ($44; AET) and Qualcomm ($55; QCOM), new additions to the Forecasts Buy and Long-Term Buy lists, look especially attractive.

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