Both Averages Must Confirm


Helped by a broad market advance, the Dow Industrials, S&P 500 Index, and NASDAQ Composite reached all-time highs. So did the S&P 1500 advance-decline line, a running daily total of advancing minus declining stocks. The Dow Transports rallied within 2.2% of the July all-time high of 9,742.76, and a close above that level is needed to reconfirm the bullish primary trend under the Dow Theory. For now, we intend to watch the averages while maintaining a nearly fully invested posture. Our buy lists have 94% to 97% in stocks.

Dow Theory update

"There is one fairly safe rule about reading the averages, even if it is a negative one. This is that half an indication is not necessarily better than no indication at all. The two averages must confirm each other."

That is how William Hamilton, a founding Dow theorist, described the concept of confirmation. While a lot has changed since he wrote those words in 1928, the underlying logic remains the same: Because the Industrials and Transports represent different parts of the market, insisting on new highs or new lows from both reduces the risk of a false signal.

If one average is lifted to significant highs by a fleeting rally in a few stocks, the status of the Dow Theory is not affected unless the other average also reaches a new high. For example, without a close above 9,742.76 in the Transports, this month's unconfirmed new high in the Industrials is basically a nonevent.

Confirmed new highs would signal that continued gains are likely — and that prior significant lows are no longer relevant. Without confirmation from the Transports, prior significant lows remain actionable, meaning breakdowns below those points could trigger a bear-market signal.

The Transports' Aug. 24 low of 9,021.12, which came after a six-week retreat of 7.4%, is clearly significant. But the Industrials' Aug. 18 low of 21,674.51 came after a two-week decline of 2%, and labeling such a minor dip as significant is problematic.

Still, if the Transports fail to close above 9,742.76, a breakdown below 9,021.12 in the Transports and 21,674.51 in the Industrials would be discouraging — and reason enough for us to raise some cash.


The last important Dow Theory signal came in July, when both averages reached all-time highs to reconfirm the bullish trend. For now, with the broad market advancing and the Transports within striking distance of a bull-market confirmation, our buy lists have 94% to 97% in stocks. For new buying, top picks include Celgene ($141; CELG) and Facebook ($173; FB).

Current Hotline

Stock Spotlight

Individual Stock Reports

ISRs make stock research easy!

Perhaps the most valuable two page reports available anywhere.

All the data you would normally have to plow through years of 10-K filings, earnings reports, and reams of market data to assemble — yours all in one concise report.

ISRs contain our proprietary Quadrix scores — find out how we rate all the stocks in the S&P 500.

Visit us at