Trusty Dow Theory Flashes Buy Signal

by Sam Collins | July 19, 2013 2:42 am

On Thursday, two Dow heavyweights, IBM (IBM[1]) and UnitedHealth Group (UNH[2]) drove the industrials to new highs, up 1.8% and 6.25%, respectively. Both reported better-than-expected earnings and both raised their full-year earnings estimate.

Adding to the general advance, jobless claims fell more than expected, and mid-Atlantic manufacturers unexpectedly advanced this month to the highest reading in over two years.

While blue chips were hitting new highs, the technology sector fell as eBay (EBAY[3]) and Intel (INTC[4]) reported below-par earnings. And even though IBM advanced on better earnings, its revenues were below expectations.

At Thursday’s close, the Dow Jones Industrial Average was up 78 points to 15,549, the S&P 500 rose 8 points to 1,689, and the Nasdaq was up 1 point at 3,611. The NYSE traded 668 million shares and the Nasdaq crossed 396 million. Advancers on the Big Board beat decliners by 2-to-1, and on the Nasdaq, advancers were ahead by 1.6-to-1.

DJI Chart
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DJT Chart
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Chart Key[5]

With new highs in both the Dow Jones Industrial Average and the Dow Jones Transportation Average, a new Dow Theory buy signal was generated. Despite earnings that may not be as strong as we would like, and Europe and the emerging markets in a slide, the trusty, old Dow Theory is telling us that there is a broad market advance under way with solid group rotation.

As proof of this point, note that a lagging group, the financials, led the market Thursday with a gain of 1.3%, while the technology stocks — the prior leaders of the advance — sagged.

Conclusion: Despite our caution about committing funds at stratospheric levels, the bull market has been confirmed. This, however, does not mean that stocks will jump to new highs again today or even next week. It just confirms that a powerful bull market is under way, and those who resist it will not benefit from it. We could still have a summer correction of 5% to 8%, but if that occurs, this new signal supports buying into any corrections.

Note: Sentiment is throwing up a bearish caution flag. The most recent AAII numbers show:

— Bullish: 47.7%, down 1.2 percentage points
— Neutral: 31%, down 1.8 percentage points
— Bearish: 21.3%, up 3 percentage points

This is the first time optimism has stayed above 40% for three consecutive weeks since Feb. 21. As a contra-indicator, this is bearish for stocks.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here[6].

For a list of this week’s economic reports due out, click here[7].

  1. IBM:
  2. UNH:
  3. EBAY:
  4. INTC:
  5. [Image]:
  6. click here:
  7. click here:

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