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The Dow Jones Industrial Average and the Dow Jones Transportation Average Reach 52-Week Highs
Dow Theory: A Primer
The Dow Jones Industrial Average closed at a 52-week high on Tuesday, along with the Dow Jones Transportation Average. According to Dow theorists, this means that we are experiencing an up market; however, it is important to consider the significance of this milestone. The Dow Theory, which was formulated by Charles Dow over 120 years ago, suggested that if revenues and profits for manufacturers are rising, shipping companies such as railroads should also see increased activity. The theory asserted that the two averages should move in the same direction, and any divergence should be seen as a warning sign. However, it is worth noting that the composition of the indexes has changed significantly since then. The Dow Jones Industrial Average now includes many non-industrial companies, while the Dow Transports incorporates various industries such as trucking, logistics, air freight, and airlines.
The New Dow Theory
Recognizing the shift towards a service-oriented economy, some experts have proposed a "New Dow Theory." One version of this theory, developed by David Keller at Stockcharts.com, compares the performance of the Nasdaq Composite (representing the new service economy) with the S&P 500 (representing the old service economy). According to Keller, if both indexes are in uptrends, it indicates a strong market. Earlier this year, Keller identified an uptrend in both indexes, which he referred to as a "bullish confirmation." He also predicted that a significant breakout would occur when the S&P 500 surpassed its August 2022 high and the Nasdaq exceeded its own August 2022 high. These milestones were indeed reached in June, with the S&P 500 closing at 4,554 and the Nasdaq reaching 14,354. Keller acknowledges the influence of the tech sector on these indexes but argues that as long as they continue to reach new highs together, market conditions remain favorable.
Challenging the "Sell in May and Go Away" Adage
Another indication of a bullish uptrend is the failure of the traditional market adage, "sell in May and go away." This saying suggests that the six-month period from May to October typically underperforms the six-month period from November to April. However, this year has proven to be an exception, as the S&P 500 has increased by 9% since May 1. Jeff Hirsch, an expert in market indicators, sees this as further confirmation of a bull market. However, he predicts a possible pause in the market with a 5% to 10% correction during the summer before resuming new highs.
The Influence of Technological Advancements
According to Hirsch, the market's ability to reach new highs can be attributed to technological advancements. He compares the introduction and proliferation of microprocessors in the 1980s and 1990s to the role of artificial intelligence (AI) today. Hirsch believes that AI could be the catalyst that drives the market to new highs. He suggests that the next significant milestone would be surpassing the historic highs set in January 2022.
A New Business Perspective on the Dow's 52-Week Highs
The recent surge in the Dow Jones Industrial Average and the Dow Jones Transportation Average reaching 52-week highs is indicative of a positive up market. While this milestone is significant, it also opens up opportunities for new businesses to capitalize on the market conditions.
The traditional Dow Theory, formulated over a century ago, emphasized the correlation between manufacturer revenues and shipping company activity. However, in today's economy, which has transitioned to a service-oriented sector, the "New Dow Theory" becomes relevant. This theory, comparing the performance of the Nasdaq Composite and the S&P 500, offers insights into the strength of the market. As both indexes show uptrends, it indicates favorable market conditions for new businesses to enter.
The resurgence of the stock market also challenges the "sell in May and go away" adage, suggesting that the market's momentum extends beyond the customary seasonal patterns. This is particularly promising for new businesses looking to establish their presence and gain traction during traditionally slower months. However, experts like Jeff Hirsch forecast a potential correction in the summer before the market resumes its upward trajectory. This projection allows new businesses to plan and strategize accordingly.
One prominent factor contributing to the market's recent highs is technological advancements, particularly artificial intelligence (AI). The role played by AI in driving the market's growth cannot be underestimated. As we witness AI's impact broaden across various industries, new businesses operating in technology-driven sectors have a unique advantage. These businesses can leverage AI technologies to innovate and disrupt existing markets, positioning themselves for success and potentially being part of the catalyst that propels the market to new historic highs.
In conclusion, the Dow's 52-week highs present new business opportunities in an up market. Understanding the evolving dynamics of the market, adopting the principles of the New Dow Theory, and leveraging technologies like AI can help new businesses thrive and contribute to the ongoing market upswing. It is an exciting time for entrepreneurs to bring their innovative ideas to the forefront and make their mark in a flourishing economy.
Article First Published at: https://www.cnbc.com/2023/07/19/transports-and-industrials-break-to-new-highs-as-stock-rally-broadens-.html.svg)
