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A more than 100-year-old buy signal just flashed in the stock market, according to LPL Research.Dow Theory is based on the relative price action of the Dow Jones Industrial and Transportation averages.The buy signal suggests there is plenty of more upside ahead for the stock market, according to LPL.
A classic stock market buy signal called the Dow Theory just flashed, according to LPL Research, suggesting that there is more upside to be had in the current rally.
LPL’s chief technical strategist, Adam Turnquist, highlighted in a Friday note that expanding participation in different areas of the stock market helped catapult the Dow Jones Transportation Average to new 52-week highs last week, confirming the broader rally in the Dow Jones Industrial Average.
“The breakout on both indices checks the box for one of the key tenets of Dow Theory—the averages must confirm each other,” he said.
The thinking behind Dow Theory is that if the economy is doing well and consumers are buying goods, transportation firms should also be doing well as long as they are tasked with moving those goods.
The theory was created by Charles Dow and is based on hundreds of his editorials published in The Wall Street Journal more than 120 years ago.
“Given the recent breakouts on both indexes, a Dow Theory buy signal has now been triggered, adding to the evidence that the primary trend for the broader market is higher,” Turnquist said.
He ran the numbers and found that when the industrial and transportation averages had overlapping breakouts to new 52-week highs, as they did last week, the forward returns for the broader market were above average.
The S&P 500 delivered an average 12-month return of 10.5% after the Dow Theory buy signal flashed, and an average gain of 6.6% over the ensuing six months, according to Turnquist.
He highlighted that the recent breakouts in both averages happened on above-average volume with momentum signals confirming the move higher, which adds conviction to the idea that stocks could continue their rally higher.
LPL Research