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Shahla
Money Managing Guru
Joined: 13 Nov 2004
Posts: 3324
Cash Points ££ 126163.28
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 Posted: Mon Feb 05, 2007 5:43 am Post subject: Dow Transports Confirms the Stocks Bull Market - Dow Theory |
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The first week of February was a memorable one for the stock market in many ways. From seeing the President make a rare appearance on the exchange floor of the NYSE, to the all-time high in the Dow Industrial index, to the breakouts in the small cap and mid cap sectors. But most memorable from a technical standpoint was the new all-time high in the Dow Jones Transportation Average (DJTA). That will be the focus of this commentary.
Every one of the eight major sectors that are part of the Group Movement Index (GMI) closed higher for the week ending Feb. 2, putting the GMI reading at a new high for the year as well as a 52-week high. The GMI is what is used to measure the strength or weakness behind the broad market, and it's arguably the simplest definition of whether stocks are in a bull market or a bear market.
What was especially gratifying to see this week were the breakouts in the Russell 2000 small cap index (RUT), the S&P 400 mid cap index (MID) and of course the Dow Jones Transportation Average (DJTA). Equally good to see was the Dow Jones Utilities Average (DJUA) turning up strongly this week and closing at just below its all-time high.
A bullish confirmation signal was generated in the Dow Jones Transportation Average on Friday. The DJTA finally closed above the 5,000 resistance level, which makes for an all-time high in this economically sensitive proxy. I've stated previously that a close above the 5,000 level would be a highly significant event, technically, and that it further holds the promise of further economic recovery as well as a continuation of the bull market in stocks.
From a Dow Theory standpoint, the Transportation index closing above 5,000 will cause a number of market technicians and investors to re-evaluate their previously bearish or non-committal stance on the future direction of stock prices (see “Ode to a Dow Theorist,” below). Those analysts that have stubbornly held to their bearish outlook, if they're intellectually honest, will at the very least question their reasons for remaining bearish. Once they openly admit that the new high in the DJTA is bullish from a Dow Theory perspective, the followers of these analysts will become more comfortable with the long side of stocks and this should translate into greater inflows into the market. A surge in trading volume followed by higher stock prices will then ensue.
Until now, the public's participation in the stock market has been very lackluster. For instance, the Rydex series of mutual funds measures participation in the stock market through its various bull and bear funds and by looking at the ratio of public assets in these funds you can gauge to what extent the public is invested in the market. Total assets in Rydex market funds is amazingly at a 3-year low despite the fact that the S&P 500 index is at a multi-year high, if you can believe that. |
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