Dow Theory Sends a Shouting Buy Signal

All the investors out there snapping up stocks in this seemingly tireless rally have one more reason to rejoice: Dow Theory says the cyclical bull run is for real.


Industrials and transports both broke their April highs last week, a key metric to tell whether Dow Theory applies. The idea is that if the two indices break out consecutively then Dow Theory comes into play and the market is likely to trend higher.

“Based on the Dow Theory, the US equity market is in a primary bull trend from the summer 2009 Dow Theory buy signal,” Bank of America Merrill Lynch analysts wrote in a research note.

Stock volume is a critical measure of whether Dow Theory applies, and BofA’s Volume Intensity Model has been positive since Sept. 10. The model measures up volume against down volume.

The firm believes the market is in a sustainable move higher.

The Standard & Poor’s 500 has been holding above the April high of 1,200 for the past three trading sessions. BofA says a sustained break above that level would put 1,250 on the table for the next test, with no resistance until the index hits the 1,300-1,350 range.

Even if the S&P fails to hold 1,220 for now, it would only need to hold 1,120 or so to confirm the rally, strategists say.

Besides Dow Theory trends, BofA also cites the always-strong third year of the presidential cycle delivering positive returns 17 of 20 times since 1931.

The average advance from the mid-term low of the second year of the presidency to the end of the four-year term is 30 percent.


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