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Dow Theory

| July 22, 2019

One of the oldest theories of the market is the Dow Theory. It was developed in the early 1900s by Charles Dow (He also developed the Dow Jones Index and was the original editor of the Wall Street Journal). The theory basically says that in order for a trend to be confirmed, the Dow Jones Industrials index and the Dow Jones Transportation index must both “break out” from either a down trend or a sideways trend. So far, the DJIA has “broken out,” but the Transport index is still almost 7% below its previous highs.

If you remember last week, we said the “pain trade” was still higher in our opinion, because most individuals and institutions are underinvested in stocks, which creates pressure to allocate more capital to stocks as markets move higher.  Michael Hartnett, Chief Investment Strategist for Bank of American Merrill Lynch seems to agree, having recently been quoted as saying “The ‘pain trade’ for the summer remains up in stocks and yields.” (Source)

Here is the other side of that coin, because we have also said for weeks now that we are “cautiously optimistic.” The cautious part comes from many parts of the markets that are not confirming certain highs in some areas. The Transports are one such index, as is the Small Cap Russell 2000 index and most international markets as well. Since our Crystal Ball is still non-functioning (read: non-existent), we will have to rely on as many data points as we can find.

That doesn’t mean we can’t get there, but until we do, this represents an area of risk. We can still climb the “wall of worry” as this market ages. As a matter of fact, one of our favorite strategists, Scott Minerd with Guggenheim Partners feels like the S&P 500 could climb to 3500 if the central banks don’t mess it up (a replay of the late 90s). Of course, everyone remembers what happened after the late 90s, right? As a hint, you probably don’t need a refresher if you were invested heavily in tech stocks at that time.

We continue to be cautiously optimistic for the public markets and we will continue to stay vigilant and if we need to, we will take protective measures. Speaking of protective measures, praise the Lord that we finally need to bust out the SPF 50 here in the PNW. Enjoy the sunshine!