Microsoft (MSFT) rises Thursday evening on Q4 earnings beat >>> READ MORE

Dow Theory Buy Signal Finally Arrives

Traders should abandon the short side of the market and trade the uptrend


Modest gains were achieved by all of the major indices Wednesday, but the spotlight was on the Dow Jones Industrial Average. The industrials ended at a new record closing high for the first time this year.

The new high was made despite an announcement that the Federal Reserve was reducing its bond-buying program by $10 billion to $45 billion. And the indices resisted another headwind in the form of weaker-than-expected U.S. economic growth. In the first quarter, the economy grew at a mere 0.1% annual rate compared with an expected 1.1%.

FactSet reported that the S&P 500 currently trades at 15.3 times forward earnings. They said that although the 10-year average is 13.8, it is still modest compared to the valuations at the top of the tech bubble in 2000 when the average P/E jumped to 25.4. The ADP employment report showed an increase in non-farm payrolls of 220,000 in April versus an anticipated 210,000. Chicago PMI for March jumped to 63, while analysts had expected 56.5.

At Wednesday’s close, the Dow Jones Industrial Average gained 45 points for a new record closing high of 16,580.84, the S&P 500 rose 6 points to 1,884, and the Nasdaq gained 11 points at 4,115. Volume on the NYSE’s primary market totaled 907 million shares with total volume of 3.7 billion shares. The Nasdaq traded 2.1 billion shares. On the Big Board, advancers outpaced decliners by 2-to-1, and on the Nasdaq, advancers were ahead by 1.3-to-1.

For the month, the Dow gained 0. 8%, the S&P 500 rose 0.6%, the Nasdaq fell 2%, and the Russell 2000 fell 3.9%. For the year, the Dow is up 0.03%, the S&P 500 has gained 1.9%, the Nasdaq lost 1.5%, and the Russell 2000 is down 3.2%.

SPX Chart
Click to Enlarge

Our 17-month moving average chart of the S&P 500 is still bullish. Thus, the bull market is alive, and despite increased volatility, is telling us to retain our long-term positions.

For long-term investors, a buy-and-hold strategy has worked well since 1999 as long as they followed the guidance of this chart. Buying when the black price line crosses above the red moving average line and selling when the black line crosses below the red line has produced some outstanding results.

DJI Chart
Click to Enlarge

Chart Key

Despite high volatility and negative economic news, the Dow Jones Industrial Average finally broke to a new closing high on its fourth attempt. Volume was higher than normal, confirming a Dow Theory bull market.

DJT Chart
Click to Enlarge

The Dow Jones Transportation Average broke to a new closing high on April 23 at 7,742.

Conclusion: A new leg up, in the form of a new Dow Theory confirmation, was triggered when the Dow industrials finally broke to a new closing high. Some may argue that the confirmation is not complete since an intraday high has not been broken. However, the Dow Theory states with absolute clarity that a signal is based solely on a higher closing value supported by higher-than-average volume.

Since both requirements were met Wednesday, we will shift to a modest buying program. Suggested investment: 75% stocks, 25% cash for long-term buyers. Traders should abandon the short side of the market and trade the uptrend.

Today’s Trading Landscape

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

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

Article printed from InvestorPlace Media,

©2017 InvestorPlace Media, LLC