Opinion: The Dow Theory just flashed a buy signal — or did it?
Dow Theorists Jack Schannep and Richard Moroney disagree on whether moves have been large and significant to qualify
CHRISTOF STACHE/AFP/Getty Images CHAPEL HILL, N.C. (MarketWatch) — A buy signal may have just been flashed by the oldest stock-market timing system that's still in widespread use today.
I'm referring, of course, to the Dow Theory, which dates back to the early decades of the last century. The reason I say that this market timing model "may" have just turned bullish is that the Dow Theorists I monitor don't always agreed on how to apply it — and now is just such a time.
Such ambiguity exists because the Dow Theory's creators never codified it into a clear and precise set of rules. It instead was introduced in dribs and drabs over three decades in editorials in The Wall Street Journal, written by then-editor William Peter Hamilton.
According to Hamilton, the stock market must jump over three hoops to reverse a sell signal and flash a buy signal:
— Both the Dow Jones Industrial Average DJIA, +0.17% and the Dow Jones Transportation Average DJT, +0.44% must undergo a significant rally after hitting new lows — significant both in terms of time and magnitude;
— In their subsequent significant correction following the market's rally referred to in the first step, either one or both of these Dow averages must remain above those initial lows;
— Both averages must then rise above their highs registered at the top of the rally referred to in the first step.
Unfortunately, Hamilton never precisely defined how long and how far the rallies and corrections must last to qualify as "significant." The Dow Theorist I monitor who just turned bullish, Jack Schannep of TheDowTheory.com, believes that shorter and smaller market moves qualify, especially in today's fast-paced markets. He turned bullish as of Wednesday's close, when the Dow industrials closed above their April 1 high.
In contrast, the other Dow Theorist I monitor, Richard Moroney of Dow Theory Forecasts, argues that only bigger and longer market moves qualify as "significant." He is focusing on the stock market's highs from last November, and says that even surpassing those highs might not be enough to generate a buy signal.
Though this lack of agreement no doubt will frustrate investors looking for unhedged clarity, too much should not be made of these Dow Theorists' disagreement. While Schannep is now advocating that clients invest 100% of their equity portfolios, Moroney's advice of 82% isn't that different.
Furthermore, Moroney says that he will increase his recommended equity allocation if and when the Dow industrials and Dow Transports eclipse their November closing highs of 17,918.15 and 8,301.80, respectively.
And that could happen any day now for the Dow industrials, and would require the Dow Transports to rally just 4.1% from current levels.
Posted by: sarah_oz@yahoo.com
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