Transports Confirm Bullish Primary Trend


The Dow Transports closed above the July all-time high of 9,742.76, reconfirming the bullish primary trend. With both the Dow Transports and Dow Industrials reaching new highs in September, the Dow Theory is squarely in the bullish camp. Our buy lists have 94% to 97% in stocks.

Broad-based strength

Some bears still complain that this year's stock market has been overly reliant on big technology stocks, that value stocks have been left behind, or that small stocks have not participated.

Such arguments are wearing thin, as it is increasingly hard to quibble with the market's trend. Not only did the Transports reach new highs in late September, so did the Russell 2000 and S&P SmallCap 600 indexes of small stocks.

Also reaching new highs in late September were the advance-decline lines for stocks in the S&P 500, S&P MidCap 400, S&P SmallCap 600, and S&P 1500 indexes. Advance-decline lines are running daily totals of advancing minus declining stocks in those indexes. 

Of the 11 sectors of the large-company S&P 500 Index, which represents about 80% of the U.S. stock market's total value, all except energy and telecom have advanced this year. Seven sectors have rallied at least 8%.

Stretched valuations

The best point made by the bears, in our view, is that stocks are expensive. While the trend may be bullish, goes this argument, today's rich valuations make stocks a risky bet.

As shown in the table below, the median stock in the broad S&P 1500 Index trades at 21 times trailing earnings, about 15% above the norm since 1994. Considering today's low inflation and bond yields, some premium to historical norms seems warranted. While bond yields have edged higher recently, stocks remain cheap relative to bonds versus historical norms.

Also, much of the market's premium is concentrated in a few sectors. The median P/Es of the energy, health-care, industrials, telecom, and utility sectors are at least 24% above the norm since 1994. Consumer discretionary and technology, the sectors with the most representation on our buy lists, trade in line with historical norms.


Investors are right to worry about stretched valuations. But with the Dow Theory bullish and our growth-at-good-price approach still able to build reasonably diversified portfolios, selling now seems premature.

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