Editor's note: Nobody has a crystal ball. But you can get a sense of what the market is likely to do next by following a few key indicators... So today, we're sharing a piece from Pete Carmasino, chief market strategist at our corporate affiliate Chaikin Analytics. In his recent Chaikin PowerFeed essay, he explained how one chart will help confirm when the new bull market is here...
The stock market is flashing all sorts of bullish signs these days...
For example, in January, Chaikin Analytics founder Marc Chaikin noted that stocks had just triggered a "breadth thrust" signal. More stocks were rising than falling... And it showed that a new bull phase could be starting, based on history.
The benchmark S&P 500 Index remains volatile today. But it's up roughly 3% since then.
And two weeks ago, Marc explained that the S&P 500 had just crossed a major milestone. This indicator has a 100% win rate since 1950. And it points to 19% upside over the next year.
Put simply, there's a lot to like about stocks right now. But we're not getting the "off to the races" type of action we expect to see in a bull market – not yet, anyway.
As I'll show you today, one indicator is getting lost in all the "bullish" talk. It has a long history of success. And it's likely the last hurdle between us and the big bull market...
We'll get to the specific indicator. But first, let's quickly get up to speed with the "Dow Theory"...
This financial theory goes all the way back to the Industrial Revolution era. Its namesake is Charles Dow, who developed the Dow Jones Industrial Average in the late 1890s.
In short, the Dow Theory has two main parts...
- Dow Jones Industrial Average
- Dow Jones Transportation Average
The Dow Jones Industrial Average tracks 30 large-cap companies in the market. Its constituents include UnitedHealth (UNH), Home Depot (HD), McDonald's (MCD), and more.
It's a wide-ranging gauge of the economy (and the stock market) as a whole.
On the other hand, the Dow Jones Transportation Average focuses specifically on how transportation businesses are doing. Think of railroads, airlines, and trucking companies.
Here's where the Dow Theory comes into play...
When both of these indexes are going up at the same time, it means the economy is strong. And if they're both going down at the same time, it means the economy is weak.
Fortunately, as investors, we can see the Dow Theory in action using price charts. And as you can see below, the chart shows that this indicator hasn't triggered yet. Take a look...
This indicator triggers when both indexes pass their previous highs.
That kind of bullish signal last happened in November 2020. Now, that might seem late to you. But with the charts, we can see that it isn't a "bottom" indicator – it's a "continuation of trend" indicator.
The last time it triggered, both indexes went on big runs...
The Dow Jones Industrial Average climbed another 25% after hitting a new high. And the Dow Jones Transportation Average surged roughly 33% in the ensuing months.
This indicator doesn't come with a perfect set of rules. However, using objective data, we can easily see the pattern when it triggers.
Remember, this indicator means the economy is healthy. And in turn, it's further evidence that stocks are headed higher. In other words, it would be an "all clear" indicator for us.
It might take time to play out. But it will boost our confidence in the bull market when it does.
As you can see, we're not there yet. So for now, we'll keep watching this indicator.
In the end, the Dow Theory is just another way to help investors like us understand the state of the economy (and, in turn, the stock market). And today, its setup is still "neutral."
But when this indicator triggers, we'll know that the bull is really getting let loose.
Good investing,
Pete Carmasino
Editor's note: Wall Street legend Marc Chaikin – founder of Chaikin Analytics – is sharing the one move he believes you need to make with your money this year to be on the right side of history. He used the same idea to make huge profits for his clients in the 1970s... a period much like today. But this time around, he says you could use this strategy to make bigger gains with his Power Gauge than anything he has ever shared before... Get the details here.
Further Reading
Investors aren't out of the woods yet. While we wait for this bullish signal to flash, three other indicators are pointing to a looming recession today. And according to our colleague Chris Igou, that means it's time to brace ourselves for volatility – at least in the short term... Learn more here.
Consumers are spending less money. For most folks, it already "feels" like a recession... And that's showing up in a few key signals. But regardless of what's next for the economy, one type of stock is always worth owning to grow your wealth over the long run... Read more here.
HIGHS AND LOWS
NEW HIGHS OF NOTE LAST WEEK
Microsoft (MSFT)... tech giant
Meta Platforms (META)... social media giant
Fiserv (FISV)... digital payments
Spotify Technology (SPOT)... audio streaming
Eli Lilly (LLY)... pharmaceuticals
Sanofi (SNY)... pharmaceuticals
Vertex Pharmaceuticals (VRTX)... pharmaceuticals
Unilever (UL)... household brands
Kimberly-Clark (KMB)... household goods
McDonald's (MCD)... burgers and fries
Starbucks (SBUX)... coffee "World Dominator"
Mondelez International (MDLZ)... candy and snacks
Hershey (HSY)... "Global Elite" chocolatier
Chipotle Mexican Grill (CMG)... tacos and burritos
Yum Brands (YUM)... fast-food brands
Monster Beverage (MNST)... energy drinks
General Electric (GE)... manufacturing
ABB (ABB)... automation
O'Reilly Automotive (ORLY)... auto parts
NEW LOWS OF NOTE LAST WEEK
U.S. Bancorp (USB)... financial services
Morningstar (MORN)... financial services
W.R. Berkley (WRB)... insurance
Pfizer (PFE)... pharmaceutical giant
Crown Castle (CCI)... communications REIT
Zoom Video Communications (ZM)... video conferencing
Zscaler (ZS)... cloud security
Match Group (MTCH)... online dating
Keurig Dr Pepper (KDP)... soft drinks
