This week the Dow Jones Industrial Average and Dow Jones Transportation Average provided indications that, according to Dow Theory, have bullish implications. On October 14, 2011, the closing of the Industrials above 11,613.53 and the Transports above 4,684.44 suggests that the indexes will at least rise to the July highs and maybe even the April 2011 highs.
This bullish implication stands juxtapose to the bear market confirmation that was received when the Industrials and Transports simultaneously declined to new lows on October 3, 2011. Our view is that we’re still in a cyclical bear market that cannot become a cyclical bull market until both indexes exceed the April and July highs. To become a secular bull market, the Industrials and Transports need to go above their 2007 high.
Some would suggest that for anyone to wait until the indexes rise to the 2011 highs there would be a lot of missed investment opportunities. However, as we’ve indicated many times in the past, we use Dow Theory signals as an allocation indicator. During bull markets, we put more money to work and the opposite is true when there is a bear market indication. There are few instances when we’re completely out of the market for an extended period of time based on a bear market indication, as demonstrated in our 2008 investment transactions. Therefore, we have little concern for “missed” opportunities.
Additionally, although we got a bear market signal on August 2, 2011, which was 96 days after the April 29, 2011 peak in the Industrials, our portfolios were up for the year. After reallocating our investment positions upon getting the bear signal, we were able to reinvest in quality companies, sometimes the same stocks, at significantly lower prices.
The coming market volatility will provide great opportunities for traders and allow investors a chance to cash out of otherwise undesirable positions and take profits. Our expectation is that the Dow will go to the July 2011 highs before struggling at the May 2011 highs. Again, we’re still in a cyclical bear market until the Transports and Industrials exceed their respective 2011 highs.
Related article: A Lesson in Dow Theory published November 7, 2010
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