The Bull Is Running: So Says Dow Theory

Three and a half weeks into 2013 the Bull is solidly in control of the market. The Dow Jones Industrial Average and S&P 500 are both closing in on the all time highs set back in 2007. The Nasdaq has surpassed the 2007 levels but remains well below the all time high from 2000. Interestingly, the Dow Jones Transportation Average has just blown past its previous record to achieve a new all time high. All of this has occurred in the face of continued economic uncertainty, record high federal debt levels and an upcoming legislative battle over the debt ceiling and the deficit.

In addition to writing this blog, I also pen a free monthly newsletter called “News and Views”. (Simply drop me a note and I’ll add you to the distribution list). Part of my monthly content includes analyzing a bunch of charts for clues on the direction of the market. This very basic technical analysis includes a discussion of Dow Theory, first proposed by Robert Rhea and George Schaeffer, based on the work of Charles Dow. At its core, the theory describes big, medium and small trends in the market. In order for the trends to be validated, the Dow Jones Industrial Average (DJIA) and the Dow Jones Transportation Average (DJTA) must be setting concurrent highs or lows.

So, according to Dow Theory, where are we right now? The easy answer is that the market is decidedly bullish. The DJIA and DJTA are both at multi-year, or all-time highs right now, having moved higher every day this week. This suggests that, in the near term at least, there should be further gains ahead. The bullish trend will remain in force until both averages move lower and fall through support to interim lows.

There are other indicators, like NYSE Bullish Percent Index and the Volatility Index (VIX), that suggest that the market may be a little ahead of itself and in danger of a correction. Even if that happens, it wouldn’t necessarily mean the end of the bullish trend. Dow Theory says that the primary trend of the market remains in force until it isn’t. So we’ll just have to keep watching for clues as to the health market. For now, the bull is running.