The Trend is Bullish and Confirmed
Dow Theory
Give the title of this blog (Marea means tide in Italian), I love the opening two paragraphs on this site:
On January 31st,1901 Charles H. Dow compared the stock market to the tides of the ocean when he wrote in the Wall Street Journal "A person watching the tide coming in and who wishes to know the exact spot which marks the high tide, sets a stick in the sand at the points reached by the incoming waves until the stick reaches a position where the waves do not come up to it, and finally recede enough to show that the tide has turned. This method holds good in watching and determining the flood tide of the stock market."
If you think of the Dow Jones Industrial Average as being the measure of the tide on one part of the beach, and the Dow Jones Transportation Average as a measure on another part of the beach, both used to determine that the tide is indeed coming in or going out all along the seashore, rather than rogue waves in one place or the other, you will understand what Dow was getting at. Confirmation by both is an integral part of the Dow Theory.
Here is the Investopedia definition of Dow Theory:
The Dow theory is a financial theory that says the market is in an upward trend if one of its averages (i.e. industrials or transportation) advances above a previous important high and is accompanied or followed by a similar advance in the other average. For example, if the Dow Jones Industrial Average (DJIA) climbs to an intermediate high, the Dow Jones Transportation Average (DJTA) is expected to follow suit within a reasonable period of time.
Here are the theorems:
There are three movements of the averages. The first, and most important, is the primary trend. The second, and most deceptive is the secondary reaction. The third, and usually unimportant, is the daily movement.
Both the Industrial and Transportation averages must confirm a trend.
The determination of a major trend has come to be known as a signal to Buy or Sell, although Dow never called them such.
The theory dates back to a time when the US was a much more industrial county. An oversimplified explanation goes something like this: the industrial companies make products and the transportation companies move them. When both groups are doing well, that is a sign that business conditions are strong or improving. When both were doing poorly, that was a sign of trouble. When one was doing well and the other was not (non-confirmation) that was a red flag telling investors to sit up and take notice. In a world that can sometimes be extremely complex, this is nice way to get a high level view of what is happening.
Based on Dow Theory, after the COVID crash, there was a buy signal given on April 6, 2020. Since then, the primary trend in the market has been up. Have there been some waves a long the way? Of course there have. But yesterday, both the Dow Industrials and the Dow Transports traded to new highs. In my mind, that satisfies the second theorem, unlike in February of last year when the Industrials made a new high but the Transports did not (red lines).
While is easy to get caught up in the day-to-day push and pull of the market, sometimes it is nice to take a step back and say “what’s the primary trend and is it being confirmed?” Right now I would answer: “Bullish and Yes” to both of these questions. From there it is simply a matter of finding the areas of the market that are performing the best and likely to continue to do so. That’s the part of the puzzle that keeps me busy most days.
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*Nothing in these pages should be considered investment advice.