ANNANDALE, Va. (MarketWatch) -- Even though the combined value of all U.S. stocks reached a new all-time high Thursday morning, most of the media attention in the past week was focused on the Dow Jones Industrial Average's failure to reach a new closing high of its own. Does that failure mean anything? What would a new Dow high mean, if and when it were to occur? For answers, I turned to the three newsletters on my monitored list that base their market timing on the Dow Theory. Surprisingly, given that it is rare for all three to agree on their interpretation of the Dow Theory, none of these three services' editors says that he would place much importance on a new Dow high. The Dow Theory is perhaps the oldest market timing system still in regular use today. Though it is named for Charles Dow, one of the founders of Dow Jones & Co., Inc., it was William Peter Hamilton who spelled out the theory in a series of editorials in The Wall Street Journal over the first three decades of the last century. Though devotees of the Dow Theory do not always see eye to eye in the application of some of the more subtle aspects of the approach, Dow and Hamilton believed we should place the greatest weight on those market trends in which both the Dow Jones Industrial Average and the Dow Jones Transportation Average are participating. Therefore, if the DJIA and DJTA jointly reach significant new highs, the stock market is likely to continue rising. Similarly, the market is likely to continue falling if both Averages jointly reach significant new lows. Potential turning points are signaled when only one of the two Averages reaches a new high or a new low, "non confirmations" in Dow Theory parlance. It is the potential for just such a non-confirmation that inclines Richard Russell, editor of Dow Theory Letters, to write that he would not be that impressed by a new DJIA high. That's because the DJTA is more than 10% below its all-time. "In other words, if the Industrials do close at a new record high, it will be flagrantly unconfirmed by the Transports. That could be as dangerous a close as it would be newsworthy." Russell also points out another reason not to be impressed with a new DJIA high: The DJIA's previous all-time record closing high occurred in January 2000. "Six years have gone by since (that previous high) was registered, and my thinking is that after three or four years or so the meaning of preceding levels in the Dow or any other stock index loses its significance." Russell believes the Dow Theory remains in the sell mode it has been in since late 1999. Dow Theory Forecasts is the second Dow Theory newsletter on my monitored list. Its editor, Richard Moroney, says he wouldn't be that impressed by a new Dow all-time high because the Dow has already done everything it needs to do to satisfy the Dow Theory: "While the Dow Industrials' bid to close at a new all-time high is garnering most of the headlines, it was this week's close above the May high of 11,642.65 that got our attention." Moroney's reason for saying this is that, if the Dow were not to have eclipsed its May high, then a major Dow Theory sell signal would have become much more likely. Because it did surpass its May high, the Dow Theory remains firmly in the bullish camp, in Moroney's opinion. In the meantime, Moroney believes, the key to the market rests more with the DJTA than with the DJIA. The third Dow Theory newsletter on my monitored list is TheDowTheory.com, edited by Jack Schannep. His interpretation of the Dow Theory currently is closer to Moroney's than Russell's. Schannep believes that, because the previous major signal triggered by the Dow Theory was a buy signal, it remains in effect until a new major sell signal is issued. In Schannep's opinion, the most bullish thing that can happen in Dow Theory terms is what's known as an "all-clear" signal, in which a potential bearish non-confirmation is overcome. For this to happen, Schannep argues, the DJTA needs to surpass its previous all-time high - which, because it is more than 10% higher than current levels - isn't going to happen anytime soon. The bottom line? The three Dow Theorists may disagree about almost everything else, but on the significance of a new Dow closing high they all agree: If and when it occurs, it won't be that big a deal. Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.
Does that failure mean anything? What would a new Dow high mean, if and when it were to occur?
For answers, I turned to the three newsletters on my monitored list that base their market timing on the Dow Theory. Surprisingly, given that it is rare for all three to agree on their interpretation of the Dow Theory, none of these three services' editors says that he would place much importance on a new Dow high.
The Dow Theory is perhaps the oldest market timing system still in regular use today. Though it is named for Charles Dow, one of the founders of Dow Jones & Co., Inc., it was William Peter Hamilton who spelled out the theory in a series of editorials in The Wall Street Journal over the first three decades of the last century.
Though devotees of the Dow Theory do not always see eye to eye in the application of some of the more subtle aspects of the approach, Dow and Hamilton believed we should place the greatest weight on those market trends in which both the Dow Jones Industrial Average and the Dow Jones Transportation Average are participating.
Therefore, if the DJIA and DJTA jointly reach significant new highs, the stock market is likely to continue rising. Similarly, the market is likely to continue falling if both Averages jointly reach significant new lows.
Potential turning points are signaled when only one of the two Averages reaches a new high or a new low, "non confirmations" in Dow Theory parlance.
It is the potential for just such a non-confirmation that inclines Richard Russell, editor of Dow Theory Letters, to write that he would not be that impressed by a new DJIA high. That's because the DJTA is more than 10% below its all-time. "In other words, if the Industrials do close at a new record high, it will be flagrantly unconfirmed by the Transports. That could be as dangerous a close as it would be newsworthy."
Russell also points out another reason not to be impressed with a new DJIA high: The DJIA's previous all-time record closing high occurred in January 2000. "Six years have gone by since (that previous high) was registered, and my thinking is that after three or four years or so the meaning of preceding levels in the Dow or any other stock index loses its significance."
Russell believes the Dow Theory remains in the sell mode it has been in since late 1999.
Dow Theory Forecasts is the second Dow Theory newsletter on my monitored list. Its editor, Richard Moroney, says he wouldn't be that impressed by a new Dow all-time high because the Dow has already done everything it needs to do to satisfy the Dow Theory: "While the Dow Industrials' bid to close at a new all-time high is garnering most of the headlines, it was this week's close above the May high of 11,642.65 that got our attention."
Moroney's reason for saying this is that, if the Dow were not to have eclipsed its May high, then a major Dow Theory sell signal would have become much more likely. Because it did surpass its May high, the Dow Theory remains firmly in the bullish camp, in Moroney's opinion.
In the meantime, Moroney believes, the key to the market rests more with the DJTA than with the DJIA.
The third Dow Theory newsletter on my monitored list is TheDowTheory.com, edited by Jack Schannep. His interpretation of the Dow Theory currently is closer to Moroney's than Russell's. Schannep believes that, because the previous major signal triggered by the Dow Theory was a buy signal, it remains in effect until a new major sell signal is issued.
In Schannep's opinion, the most bullish thing that can happen in Dow Theory terms is what's known as an "all-clear" signal, in which a potential bearish non-confirmation is overcome. For this to happen, Schannep argues, the DJTA needs to surpass its previous all-time high - which, because it is more than 10% higher than current levels - isn't going to happen anytime soon.
The bottom line? The three Dow Theorists may disagree about almost everything else, but on the significance of a new Dow closing high they all agree: If and when it occurs, it won't be that big a deal.
Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.
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