The recent achievement of 52-week highs by both the Dow Jones Industrial Average and the Dow Jones Transportation Average is a promising sign for the broader bull market. This strategy, rooted in historical accuracy, is highly regarded when it comes to identifying primary trends in the stock market.
On Tuesday, the Dow industrials (DJIA) are poised to extend their winning streak to 12 consecutive days, a feat that hasn’t been seen since February 2017. They have experienced a remarkable increase of almost 24% from their 52-week closing low in September, reaching their highest level since February 9, 2022. Similarly, the transportation index (DJT) has also witnessed an upward trajectory and is up by 21% this year, culminating in a 52-week high last week.
While the blue-chip Dow has gained about 7% year-to-date, it is playing catch-up with the S&P 500 (SPX), which boasts a more than 19% increase, and the Nasdaq Composite (COMP), which has surged by over 35% in 2023.
Dow Theory: A Reliable Indicator
Dow Theory suggests that if two averages—typically the Dow industrials and the transportation index—achieve new highs within a short period, it indicates a high probability of the broader stock market heading towards an upward trajectory. This strategy has been in existence since the early 1900s and was developed by Charles H. Dow, a founding figure behind The Wall Street Journal and Dow Jones & Co., the publisher of financial news.
Adam Turnquist, chief technical strategist for LPL Financial in Charlotte, N.C., explains, “One of the tenets of Dow Theory is that the averages must confirm each other, meaning breakouts and breakdowns should happen in concert, and that’s what is happening now.”
With the recent breakthroughs in both Dow Jones indexes, the occurrence of a “Dow Theory buy signal” was confirmed last week. This adds to the mounting evidence that substantiates the sustainability of the current bull market. LPL Financial defines a bull market not only by the widely-used definition of a 20% or more gain from a bear low but also based on a comprehensive evaluation of other factors, such as breadth—the level of participation of stocks in the upward trend.
The Current State of the Stock Market
Overview
In a recent chart analysis, it has been observed that the Dow Jones Industrial Average, Dow Transports, and the S&P 500 tend to experience average forward returns after a buy signal is registered.
Synchronization with the Summer Rally
According to Stephen Suttmeier, a technical research strategist for BofA Securities, the major U.S. stock indexes have become more synchronized with the ongoing summer rally. This synchronization has led to positive momentum in the market.
Record Highs for Major U.S. Stock Indexes
Last week, all three major U.S. stock indexes achieved their highest levels in 15 months. Since then, the Dow industrials have continued to climb steadily, showing no signs of slowing down.
Positive Indicators for a Bull Market
Various indicators have recently signaled a bullish backdrop, supporting the case for a much higher equity market well into 2024. The current rally, often referred to as the “FOMO (Fear Of Missing Out) 2023 summer rally,” has received significant confirmation. Additionally, both the Dow industrials and the transportation gauge are in confirmed bull markets based on Dow Theory.
Market Outlook Prior to Federal Reserve Announcement
On Tuesday, financial markets entered a wait-and-see mode as investors anticipated Wednesday’s policy announcement by the Federal Reserve. This cautious approach resulted in upward movement for all three major U.S. stock indexes. Meanwhile, yields on Treasury bonds ranging from 2 to 30 years also increased during afternoon trading, reflecting a higher-for-longer theme in U.S. rates.
A Surprising Admission from a Notorious Bear
Known for his bearish stance on the stock market, Mike Wilson, the chief U.S. equity strategist for Morgan Stanley, issued an unexpected mea culpa. In a note to clients on Monday, Wilson admitted that he and his team were wrong in their assessment and that the current upward movement in equity multiples has surpassed their expectations.
A Contrarian View
Not all market analysts share the same optimistic outlook. Marko Kolanovic, from JPMorgan Chase & Co., has consistently maintained a bearish stance this year. He stands by his prediction of a stock-market selloff, stating that fresh market declines and volatility are likely to occur due to the delayed impact of interest-rate hikes, declining consumer savings, and a “deeply troubling” geopolitical backdrop.