With stocks hitting new highs on a regular basis, investor sentiment fairly high, corporate profits at record levels, and the month we’re all supposed to sell before going away (May) just behind us, it’s tempting to think the stock market is riding for a fall.
But one timeless technical indicator is telling us just the opposite. It says stocks are going higher, and the economy will be fine.
I’m talking about the Dow Theory shipping stock indicator.
Dow Theory, a kind of technical analysis, was culled from the market columns of journalist Charles Dow (1851-1902), who was the founder and first editor of the Wall Street Journal. Dow Theory is basically a boiled down version of all his market columns.
One of the six principles of Dow Theory is pretty simple. It starts with two basic assumptions: 1) manufacturers have to ship their goods, and 2) stocks are often a leading indicator of earnings and economic trends.
Thus when the transport and shipping stocks are hitting new highs and leading manufacturing stocks, it’s a bullish signal that the economy is improving.
Dow theory also holds that it’s bullish for both the economy and stocks when the transports and manufacturing stocks confirm each other in concurrent up trends.
That’s exactly what we have now.
“The S&P 500 Transportation stock price index is up 9.9% year to date to a new record high, outpacing the 4.1% increase in the S&P 500,” points out Ed Yardeni, an economist and strategist with Yardeni research.
For a chart, click here.
Truckers are up 17.6%, railroads are up 10.5% and airlines are up 43.5%, while air freight and logistics stocks are off slightly.
And you see the same with the Dow indices. The Dow Jones Industrial Transportation average is up 9.5% so far this year, and the Dow Jones Industrial average is up over 1%, both at new highs for the year. For a chart, click here.
“This is a bullish development according to Dow Theory, which posits that as the Dow Jones Industrial Transport Average goes, so go the economy and the Dow Jones Industrial Average.
This suggests that the US economy is growing at a solid pace,” says Yardeni.
For stock investors, one thing that worries me a bit is that investor sentiment is starting to creep up again. We did have a 5% correction four months ago, and we had 5%-6% corrections last fall and summer, all of which tempered enthusiasm a bit.
But the Investors Intelligence Bull/Bear Ratio, which is based on surveys of market pros for their outlooks, is now above three. That is a red flag zone for me, though levels above three by no means on their own suggest a correction is at hand. Meanwhile bullish sentiment just hit its highest level for the year, when it rose above 58%.
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