Theorist Optimistic 'Buy' Signal Coming
Sunday April 13, 11:19 am ET
biz.yahoo.com
NEW YORK (Reuters) - The Dow Jones industrial average (CBOT:^DJI - News) has gained 11 percent since its most recent low, and at least one follower of a stock market gauge known as the Dow Theory is optimistic there may be a major "buy" signal in view.
Dow theorists argue that gyrations in the 30-stock industrial average indicate a market trend when backed up by a similar move in the 20-stock Dow Jones transportation average (CBOT:^DJT - News).
"We have held above the lows, and now turned back up," said Jack Schannep, editor of the TheDowTheory.com, who has been following the theory since 1960. "If we go above (the most recent highs) on the Dow industrials and the Dow transports, it will declare a Dow Theory market 'buy'."
The Dow Theory, named after Wall Street Journal co-founder Charles Dow, has been around for a century and is based on Dow's writings and observations where he split the industrial and railroad stocks into two separate averages.
The rationale is that railroad or transport companies move raw materials to manufacturing companies, or the industrials, and then transport the finished products to places of sale.
For the economy to be healthy, both sectors have to be utilized and that will be seen by moves in related stocks.
A cornerstone of technical research, the theory has advanced from Dow's time and now focuses on the eponymous transportation average -- which includes railroads, airlines, sea container shipping companies, and truckers.
A NEW BUY
In getting more bullish, Schannep takes the most recent lows from March 11 -- where the Dow industrials closed at 7,524.06 and the Dow transports were at 1,942.19 -- as a retest of what some see as the October 2002 market bottom.
Since then, although both averages have pulled back, they held above those lows and have turned higher.
"The higher highs situation with higher lows, is a classic uptrend," Schannep said.
Confirmation of a new "buy" signal, according to Schannep, will come when the Dow average rises above 8,521.97, its March 21 closing high, and the transportation average closes above 2,263.49, its most recent closing high, again on March 21.
The Dow industrials traded up 0.6 percent to 8,354.95 on Wednesday, while the transportation average rose 0.9 percent to 2,220.62 in late morning trading.
One problem, though, is that not all Dow theorists necessarily see the same thing, at the same time.
Rich Moroney, editor of Dow Theory Forecasts, which has been publishing since 1946, argues that the market's primary trend is still bearish.
While the industrial average held its October 2002 closing low during the most recent downtrend, Moroney notes, the transportation average broke through it's Oct. 9, 2002, low -- signaling the bear market may still have room to run.
"If the industrial average trends below 7,286.27 (the Oct. 9 closing low) it will confirm the bear market," Moroney warned.
Schannep acknowledged that he is more aggressive on "buy" signals than other theory followers arguing that with the speed of technological innovation and communication today, things just "happen more rapidly than they did previously."
RELEVANCE
To be sure, some say Dow Theory may not be as reliable or even relevant as it was a century ago. The U.S. economy has become more focused on services, as manufactured goods became cheaper to assemble overseas where labor is less expensive.
That means sectors like banking, securities services and computer software have a greater impact on the U.S. economy than makers of refrigerators and washing machines.
Others argue that while the Dow Theory has an underlying economic argument, technical analysis itself is fundamentally flawed.
"There is a compelling theory underlying it, but it's still a pattern-based technical analysis," said Charles Kaplan, chief executive of Equity Analytics, a Web-based economics and statistical consulting firm. "It's not a good way to make money in the long term unless you know when it's going to be right or wrong."
Schannep dismisses the criticism. He emphasizes the theory will not indicate the duration or extent of any move in stocks, but rather whether they are a "buy" or a "sell."
There may be two or three signals a year or none at all, he said. The "buy" signal in December 1990 was not reversed until August 1998, and almost exactly coincided with the longest economic expansion in U.S. history. |
