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The Honolulu Advertiser
Posted on: Friday, March 19, 2010

Stock forecasting theory points up


By ADAM SHELL
USA Today

Hawaii news photo - The Honolulu Advertiser

According to Dow Theory, a century-old forecasting system, the U.S. stock market is likely to keep rising.

Associated Press library photo

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NEW YORK It's getting harder for stock naysayers and nonbelievers to talk down, belittle or ignore the mushrooming bull market.

After posting gains eight days in a row and climbing to levels not seen since October 2008 and hitting a bull market high, one of Wall Street's oldest trend-spotting tools is signaling that the primary trend of the blue-chip Dow and U.S. stock market is up.

Dow Theory, a forecasting system devised more than 100 years ago by Wall Street Journal editor Charles Dow, is back in the bullish camp.

The shift to the bull camp after the Dow Jones industrial average has already climbed 65 percent from its March 9, 2009, bear market low occurred this week when the Dow passed its previous bull market high attained on Jan. 19. The new high for the industrials follows a new high notched a week earlier by the Dow Jones transportation average a key confirmation signal, according to the century-old Dow Theory.

"The weight of the evidence suggests the primary market trend is bullish," said Richard Moroney, editor of Dow Theory Forecasts.

Moroney would rather have seen the market take more than an 8 percent drop from January highs. But the fact that all major U.S. indexes are trending higher and are at 17-month highs tilted him to the bullish corner. Yesterday, he advised clients to trim their cash to 10 percent to 15 percent, from 25 percent in early March.

The premise of the Dow Theory is simple: If shares of industrial companies that make aluminum, computers, planes, farm equipment and soft drinks are hitting fresh highs at the same time as shares of the transportation companies that deliver those goods, it signals that the market's upward move is healthy.

"It's vital that more than one index shows similar signals in a close period of time," ChartAdvisor.com analysts Chad Langager and Casey Murphy wrote on Investopedia. "It is a sign that business conditions are moving in the indicated direction. Thus, rising stock indexes signal a new uptrend."

A weakness of Dow Theory is that by the time the market sends a clear signal that the trend has changed from down to up, the market has already posted sizable gains.

But Richard Russell, editor of Dow Theory Letters, said in a note Wednesday that now is not the time to buy.

"Stocks are generally overvalued," he wrote. "The market is not priced for future profits over the next five to 10 years."