Seasoned stock traders will tell you one of the most important criteria of a true bull market is breadth. By this they mean that share prices should be rising across a broad variety of industries. The rising economic tide should lift all boats. If it doesn’t, something is amiss.
Charles Dow, co-founder of the Dow Jones Co. and first editor of The Wall Street Journal, articulated these principles in the Dow theory back in the 1890s. The eponymously named theory is the granddaddy of all technical analysis, still followed religiously on Wall Street over 120 years later.
In brief, the Dow theory states that in order for a bull market to be legitimate and long-lasting (thus of interest to long-term investors, which Dow was and most technicians these days are not!), both the Dow Jones Industrial Average and the Dow Jones Transportation Average have to be moving in the same direction. If goods and services are being produced (measured by the rising “industrials”), they also have to be shipped and transported to markets, so the “transportation” companies should be booming, as well.
Back in Dow’s day this meant railroads, and if you can still remember the Dow Jones Rail Road (two words) average being posted on the 2nd to last page of The Wall Street Journal, you are getting on in years. Nowadays with airlines, truckers, shippers and logistics companies, the average is much broader and its name has been updated. Even so, Dow was farsighted: he included Western Union in the original average, well aware that information had to be transmitted in order for the economy to thrive.
My attention was drawn to the Transportation average because earlier this month it finally surpassed its high from July 2011. For the past 18 months, as the Industrials surged upward in several powerful waves, the Transportations remained the laggard. This stone in the boot of stock analysts not only refused to join the Industrials in new highs, it actually fell during most of 2012!
Finally, to the joy of all technicians, the Transportation average joined the party around Thanksgiving. In early January, they finally surpassed the highs set before the European debt crisis, on July 7, 2012. (Don’t you love it when the bankruptcy of socialism drags us down with it?) Dow theory followers say the average has “confirmed” the bull market.
What a pity that Mitt Romney — you remember him, don’t you? The one, it turns out, who wasn’t really sure he wanted to be president? And 52 percent of the electorate wasn’t sure either. But I digress. What a pity that Mitt Romney doesn’t really know how our economy works. The strength in the Transportation average is due in large part to lower fossil fuel prices, a direct consequence of fracking, conservation and exploration: all private-sector initiatives that owe no allegiance to our mega-trillion dollar fiscal stimulus programs. He could have pointed out that President Barack Obama deserved no credit for the recovery.
All water under the bridge. The recovery continues in spite of, not because of, government policy.
Investors, still spooked by the 2008 crash, are very late joining this party. Too late? Maybe not. Most of the same trends are still in place, and as the effects of real estate prices and improved consumer balance sheets begin to kick in, the nearly four-year-old bull market may have a lot more life left in it.
© 2013 Moneynews. All rights reserved.