Dow Theory says today’s bull market is healthy.
This wasn’t the case last February when I wrote to Boom & Bust subscribers about “the Dows.” No that’s not a typo… there are several Dow Jones averages… not just the commonly quoted Dow Jones Industrial Average.
By comparing two of these – the Industrial Average and the Transportation Average – I’m able to judge the strength of a bull market.
Basically, when both averages are making higher highs, the bull market is healthy. But when one is and one isn’t… investors should be more cautious.
The Industrial Average was making new highs last February – breaking above its 2011 high of 12,876 – but the Transportation Average wasn’t. It was still well below its own 2011 high and struggling to make a move any higher.
You can see this here…
The Transportation Average’s performance was lackluster for most of 2012. But that all changed in mid-November when it started trending higher. It’s gained 21% in just the last three months.
More importantly, the Transportation Average is now making higher highs. It’s trading above the highs it made in both 2011 and 2012. And that confirms the strength we’re seeing in the Industrial Average, which has also already beaten its own 2012 high.
This tells me the current bull market still has room to run higher.
We don’t necessarily like it and we don’t believe it will last because we know it’s a Fed-manufactured bull market. But it is what it is… and we won’t go broke trying to fight the Fed on ideology alone.
If you haven’t done so already read the Survive & Prosper issue on “Bernanke Should Appear on Oprah.“