To Start the Week: Bull Market in Stocks Reconfirmed by Dow Theory
Starting this week, we recognize the re-confirmation of the continuing bull market in stocks, this according to Dow Theory. In a recent post about the startlingly bad results reported by IBM and McDonald's, we reminded you to keep your eye on the larger stock market despite the poor earning of these two giants:
For example, shortly before the debacle in stocks in 2008, we received a bull market confirmation in late 2007 when both the Industrials and Transports hit record highs. As it turned out, the market had topped, although that was not something that could be indubitably known at the time. Given the length of the current bull market, we may be in a similar situation, where a long in the tooth bull hits its final highs before the bear catches up and sinks his teeth into a weary bull. But the fact remains that under Dow Theory we simply don't know that.
Using one's common sense, here, we might simply note that after a years-long bull, it's probably not the time to establish aggressive positions in stocks towards the latter stages of this long-term - very long in this case - bull market trend. And yet, we can't rule out continuation of the trend for an unspecified length of time. I suppose if greed gets the best of you, you might be tempted to go "all in" and try to catch the last stages of any bull market. Just don't count on Dow Theory to protect you if you do. It notoriously defines the turn of a market after either tops or bottoms have occurred. If you rely on Dow Theory, you simply must accept the fact that you won't catch a top or a bottom either exactly, or anywhere close to exactly. But you will get confirmation close enough to make prudent decisions. And, frankly, prudence dictates that one expel any thoughts or desires of catching tops or bottom of long-term trends. For catching tops and bottoms, one would do best to stick with intermediate or short-term trends, which would require other methodologies or disciplines aside from Dow Theory. Alas, we don't have any brilliant suggestions here.
On a closing note, we would be remiss if we did not recognize the Japanese central bank's announcement last Friday that they would re-boot their money printing on an even more massive scale. It was that supposedly surprising announcement that lit the fire under world stock markets, sending them up across the globe. The new injections of liquidity now coming will most likely stoke the furnace of the bull market for a period of time. The unintended consequences, however, will most likely boil beneath the surface and become apparent as time goes on. But such consequences would be the subject of another post. For now, the bull awaits the opening bell in New York, ready to run another few laps.
...we wait to see what the Dow Industrials and Dow Transports do in the coming weeks. If they both exceed their mutual September highs, we're probably looking at more bull.Setting aside the inevitable arguments over interpretations of this esteemed theory used to determine long-term trends in stocks, it would be hard to argue against the action of the Dow Industrial and Dow Transportation indices last week: both exceeded their recent September highs within days of each other, setting all-time highs in the process. With this agreement between the two indices, we have our re-confirmation. What to do about it, though, remains open to question.
For example, shortly before the debacle in stocks in 2008, we received a bull market confirmation in late 2007 when both the Industrials and Transports hit record highs. As it turned out, the market had topped, although that was not something that could be indubitably known at the time. Given the length of the current bull market, we may be in a similar situation, where a long in the tooth bull hits its final highs before the bear catches up and sinks his teeth into a weary bull. But the fact remains that under Dow Theory we simply don't know that.
Using one's common sense, here, we might simply note that after a years-long bull, it's probably not the time to establish aggressive positions in stocks towards the latter stages of this long-term - very long in this case - bull market trend. And yet, we can't rule out continuation of the trend for an unspecified length of time. I suppose if greed gets the best of you, you might be tempted to go "all in" and try to catch the last stages of any bull market. Just don't count on Dow Theory to protect you if you do. It notoriously defines the turn of a market after either tops or bottoms have occurred. If you rely on Dow Theory, you simply must accept the fact that you won't catch a top or a bottom either exactly, or anywhere close to exactly. But you will get confirmation close enough to make prudent decisions. And, frankly, prudence dictates that one expel any thoughts or desires of catching tops or bottom of long-term trends. For catching tops and bottoms, one would do best to stick with intermediate or short-term trends, which would require other methodologies or disciplines aside from Dow Theory. Alas, we don't have any brilliant suggestions here.
On a closing note, we would be remiss if we did not recognize the Japanese central bank's announcement last Friday that they would re-boot their money printing on an even more massive scale. It was that supposedly surprising announcement that lit the fire under world stock markets, sending them up across the globe. The new injections of liquidity now coming will most likely stoke the furnace of the bull market for a period of time. The unintended consequences, however, will most likely boil beneath the surface and become apparent as time goes on. But such consequences would be the subject of another post. For now, the bull awaits the opening bell in New York, ready to run another few laps.
Comments