Industrials Come Up Just Short


The Dow Industrials rallied within one point of their July all-time high of 17,138.20 but have yet to close above that level, meaning recent new highs in the Dow Transports have not been confirmed. For now, we intend to watch the averages while holding 94% to 98% of our buy lists in stocks.

Both averages must confirm

Confirmation — the idea that both the Industrials and Transports need to reach new highs or new lows for a valid signal — is central to the Dow Theory. As founding Dow Theorist William Hamilton wrote in 1913, "A new low or a new high made by the one but not confirmed by the other is almost invariably deceptive."

Especially after an extended advance, unconfirmed new highs can be a dangerous omen. Without a close in the Industrials above 17,138.20, a breakdown below the August lows of 16,368.27 in the Industrials and 7,992.08 in the Transports would represent a bear-market signal.

Also worrisome is the scant attention being paid to the Industrials' failure to surpass their July highs. In fact, several prominent Wall Street strategists have switched to the bullish camp in recent weeks, and surveys suggest bullishness among individual investors has jumped above long-term norms. Among newsletter editors, the percentage of bears recently dropped below 15%, the lowest level since 1987, according to Investors Intelligence.

Still, while a market dip would not be surprising, raising cash seems premature. For one thing, nothing says the Industrials and Transports must reach new highs on the same day. The last confirmed signal under the Dow Theory was the bullish reconfirmation in July, so the primary trend is presumed bullish until proved otherwise. The Industrials are nearly 4% above their August low, versus more than 6% for the Transports.

Also, the whole point of the Dow Theory is to determine the majority money opinion, and other indicators suggest that opinion is bullish. Indexes weighted by stock-market capitalization, including the large-company S&P 500 and all-company Wilshire 5000, reached all-time highs earlier this month. So did the S&P 1500 advance-decline line, a running daily total of advancing stocks minus declining stocks.


The state of the Dow Theory depends only on the action of the Industrials and Transports, and we intend to raise cash if we get a bear-market signal. But with the weight of the evidence still favoring higher stock prices, we're sticking with a nearly fully invested posture. Especially attractive buys include Alaska Air Group ($47; ALK) and Lear ($103; LEA).

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