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Dow Theory back in action as transports, industrials hit record
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Dow Theory back in action as transports, industrials hit record

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Dow Theory back in action as transports, industrials hit record

Last week, the Dow Jones Transportation Average DJT +0.61% closed at a record level, exciting a lot of Dow Theory enthusiasts who waited for the confirmation from the Dow Industrials. Finally, they got it.

The theory, developed by Charles Dow in 1884, states that when both the industrials and transportation stocks rally to close at record levels in tandem (the modern strategist interprets it as within a few days), it signals long-lasting market gains — i.e. the ‘buy signal’.

The Dow Jones Industrial Average DJIA -0.13% had struggled to scale a new high until Wednesday, when it finally closed at a record level.

Nicholas Colas, chief market strategist at ConvergEx Group, a global brokerage company based in New York, says that the Dow Theory has a long historical track record of predicting bull markets.

“It would be nice if the transports and industrials moved together, but given current volatility, the theory still holds even if they hit new highs within days.”

He also points out that within the transportation index it is the airlines that have rallied the most. Delta Air Lines DAL +0.49% is up 35%, while Southwest Airlines LUV is up 29% since the start of the year. The Dow Transportation index is up more than 4%, compared to a 1.9% gain in the S&P 500.

Airlines companies’ earnings have long been the most volatile, says Colas. But the industry has changed after consolidations and it looks like their profits are turning out to be a lot more sustainable, given the improving economy.

“When investors buy airlines and other transport companies, it indicates a lot of confidence in the economy,” he said.

Dow Theory back in action as transports, industrials hit record - The Tell - MarketWatch

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