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Transport Index Triggers Buy Signal

 
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arthur
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PostPosted: Sun Sep 05, 2004 7:02 pm    Post subject: Transport Index Triggers Buy Signal Reply with quote

Transports' Rise Triggers Dow Theory Buy Signal
Friday September 3, 12:01 am ET
By Mark Hulbert


ANNANDALE, Va. (CBS.MW) - The three Dow Theory newsletters I monitor are now all in agreement that the stock market's near-term direction is up. Up until Thursday's close, the score was two bullish and one bearish.

The two bullish newsletters were Dow Theory Forecasts, edited by Richard Moroney, and TheDowTheory.com, edited by Jack Schannep.
The bearish one was Richard Russell, editor of Dow Theory Letters. He had been arguing that the Dow Theory was bearish for both the market's nearer and longer terms.

For the record, Russell still is bearish for the stock market's longer-term. But strength in the Dow Transports Average on Thursday was enough to cause Russell to switch his opinion of the market's shorter-term prospects.

For those of you not familiar with the Dow Theory, let me outline its general approach. The theory places great weight on whether the two primary Dow averages - the Dow Transports and the Dow Industrials (^DJI - News) - are moving up or down in concert.

The Dow Theory considers it to be particularly bullish, for example, when both Averages jointly reach significant new highs. In contrast, it is bearish when both Averages reach significant new lows.

Potential market turning points are signaled when only one of the two Averages reaches a significant new high or low, an occurrence that Dow Theorists refer to as a non confirmation.

The application of the Dow Theory in any given instance leaves significant room for interpretation, however. Both Moroney and Schannep, for example, believed that it was bullish during August when, despite the Dow Industrials closing at a new 2004 low, the Dow Transports' remained well above its low for the year.

But over the last ten days or so, Russell chose instead to focus on the Dow Transports' relative weakness during the market's rally off those August lows. Though the Dow Industrials fairly quickly rose above its August 2 peak, the Dow Transports -- until Thursday -- remained well below.

Writing a week ago about this non-confirmation that then still existed, for example, Russell wrote: "Trouble often is signaled by a sneaky non-confirmation that no one has noticed. For this reason, we should watch the Transportation action very carefully. I take the Transport non-confirmation all the more seriously since the price of oil has come down sharply since its August 20 high of 48.35, and the drop in oil should be helping the Transports."

This non-confirmation was erased in Thursday's rally, however, when the Dow Transports rose by far more than enough to eclipse its Aug. 2 peak. Russell led his summary of Thursday's market with the sentence: "Hello Transports, you've finally confirmed - with conviction."

Despite the confirmation, Russell says he's still worried about the markets' light volume. And, given that stocks aren't cheap according to conventional valuation measures, he doubts that the market will be able to produce very attractive long-term returns from current levels.

But at least for now, as Russell noted last night, these concerns don't seem to be bothering anyone else. "This is as strange a rally as I've seen in quite some time, but maybe I'm just too picky. Russell, get with the program!"
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