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Classic DOW signal

Last night the DOW 30, S&P 500 and NASDAQ all made record new highs.

bg_dow jones
Source: Bloomberg

So far 20 of the past 22 trading days have been higher (as of 9 December 2016).

This overlay of the Dow 30 and the Transports* shows a true bull market signal, as they both confirm each other breaking to new highs.

This graphic has the DOW moving above its early 2016 high and above the 2015 high.

The transports have confirmed this movement with a rally above the early 2016 high and 2015 high.

The importance of this cannot be underestimated as fund managers, trend traders and the broader general public use this indicator of market direction for position trading.

So where to from here?

Markets are never a straight line and there are some key equity drivers for the index.
Equity indices are often made up from a weighting of large cap stocks. In Australia, the top ten stocks account for 57% of the index’s value, and this includes the four banks.

The Dow 30 is heavily weighted with Goldman Sachs and 3M, with IBM and United Health coming in fourth and fifth. For the larger and more diverse S&P 500, the leading component is Apple at $720 billion and the smallest, Diamond Offshore Drilling, at $3.65 billion.

With the shifting view that the world may be on the slow road to recovery, these two indices are pricing in future growth and activity. This is expected to flow on to other geographical markets like Australia.

Typical pullbacks and retests of support will occur. The chart also shows the relative strength indicator in overbought territory, suggesting the market may reverse in the short term.

dow-091216

For the Australian 200 index, key technical levels are emerging. The first is resistance at 5626 – being the August 2016 high. We are fast approaching this level with the underlying volatility below the key 18 level. This suggests markets are not pricing in forward events that bring uncertainty.

For Australia, the future lies in the commodity markets, which are currently in reinflation mode. With oil not firmly over US$50bl, other key export commodities. Bauxite, aluminium and iron ore are trending higher into 2017.

 

*A short lesson in Dow Theory: Charles Dow believed the two averages needed to conform as this indicated the rail and road transports were busy delivering the raw materials required for manufacture of goods and services. As the manufacturers came under pressure from rising interest rates and saw sales slowing, the Transports index slowed in response, giving market participants an early signal the markets are about to turn.

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