Dow Theory says new highs are coming.
Back in May, I wrote in this space that the Dow Theory signaled a screaming buy on the Dow Industrials.
Since then, the Dow Industrial Average has added more than 1,000 points — and is now trading at 15,610…
You can’t argue with those returns.
The question now is: Where do we go from here?
Are the Dow Industrials still a buy?
Well, according to the chart, both the Transports and the Industrials just hit new all-time highs:
If you’ve never heard about the Dow Theory before, here’s a little background…
The idea was dreamed up by Charles H. Dow in the late 1800s. Charles also happens to be the guy who founded the Dow Jones Industrial Average, as well as a small-town rag called the Wall Street Journal.
Dow’s idea was simple: If the industrial companies are doing well, they have to ship stuff. And if the shipping companies are doing well, then they must have something to ship.
So strength in these companies indicates strength in the economy.
Furthermore, if the Transports and the Industrials confirm each other, then you have a trend, up or down.
If the transportation companies are lagging, it could foreshadow a fall in Industrials. That’s the logic, anyway.
As you can tell by the chart above, the Transports just launched. The Industrials confirmed. The trend is bullish.
The Dow Jones Transportation Index hit an all-time high last week on the same day as the Dow Jones Industrial Average.
History tells us that we will be up 13% over the next 12 months.
If you go back to 1950 and look at when the Dow and the Transportation Index both made new all-time highs on the same day, you’ll notice the median return from the Dow was 13% compared to a 7.64% median return on the Dow at any time…
The Transports, however, showed a below-average return.
According to the Wall Street Journal:
When the Dow and transports are both making new highs, it seems that’s just about the time transports begin to stall. One year after a signal, the transports average a gain of just 1.55%.
This by far under-performs the typical one-year return of 9.93% for the transportation index.
If past is prologue, the Dow Industrials will hit 17,639.3 by next summer.
Gold Looks Fragile
A month ago, I told you that gold was going to rally off the bottom — and that you should buy calls based simply on the trend and range.
In the first week of July, it was obvious that gold was going to bounce.
It was oversold on the MACD… there was a doji… and so on…
Today, that play has finished.
The chart is rolling over and volume is down.
If you are still in this play, it is time to take profits.
Look for a bottom pattern around $1,150 or a break above the top of the range as your next buy signal.
All the best,
Christian DeHaemer
Check us out on YouTube!Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor’s page.
