Both Averages Must Confirm


The Dow Transports broke below their last significant low point, the Jan. 30 close of 8,649.32. If the Dow Industrials follow suit and move below their Jan. 30 close of 17,164.95, we'd view the primary trend as bearish under the Dow Theory.

Conversely, if the averages can close above their all-time highs of 9,217.44 in the Transports and 18,288.63 in the Industrials, the bullish primary trend would be reconfirmed. We'd also like to see new highs in the S&P 500 Index and the S&P 1500 advance-decline line.

For now, we are keeping about 85% of our buy lists in stocks. With a bear-market signal, our equity exposure will be reduced, likely to 75% or lower. Our reaction to a bull-market confirmation will depend on the opportunities we see in individual stocks.

Manufacturing sector slows

While the breakdown to new lows in the Transports is discouraging, it is a mistake to reach definitive conclusions based on the action of one average. As founding Dow Theorist William Hamilton wrote in 1928, "Half an indication is not necessarily better than no indication at all."

Hamilton, who put together the Dow Theory based on editorials Charles Dow wrote in The Wall Street Journal, never explained why the two averages must confirm. Both he and Dow based their writings on empirical observation, concluding that the averages did confirm in advance of genuine changes in the primary trend.

Still, there is probably some truth behind the idea that the Transports take what the Industrials make — and that something may be out of whack if the averages are out of sync.

Nowadays, the Industrials include companies from a wide variety of industries, making everything from shampoo to iPhones to software. Yet the Transports remain squarely focused on moving goods and people from one place to another, making them highly sensitive to the outlook for the U.S. manufacturing sector.


The Industrials are within 2.5% of all-time highs. The Transports are more than 6% from new highs but could gain ground quickly if March-quarter results provide reason for optimism on the U.S. industrial sector and the airline industry.

On the downside, the Industrials are roughly 4% from 17,164.95, meaning a disappointing start to earnings season could be enough to trigger a bear-market signal.

We say it every quarter, but this earnings season will be crucial.

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