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Dow Theory

On August 22, 2017 the Dow closed at an all-time high. Was that the end of the bull market? Dow Theory is the oldest of the stock-market timing systems in use and it still remains in widespread use today. William Hamilton created it over 100 years ago. He was the editor of The Wall Street Journal at the time.

So what has to happen for the bull market to end under the Dow Theory? Basically, three events have to occur as follows:

1. The Dow Jones Industrial Average and the Dow Jones Transportation Average (both) must show significant declines (lets say 5%) after hitting new highs. We are nowhere close. We just had a small dip in the historically weak month of August.

2. After this decline of both the Dow and the Dow Transports there is a rally where either one or both fail to break above their previous highs. Again, we can’t test this yet because we have not experienced the first requirement yet.

3. Finally, after the failed rally the averages must then fall below their previous lows registered at the bottom of the decline referred to in step No. 1 above.

Therefore, we appear to be in a seasonally weak period but still in a bull market. As one of my friend Rick states, “earnings are the mother’s milk of the stock market” and mom’s milk is great right now. It is all about earnings and earnings are good.

There are many analysts that continually state that the sky is about to fall. Why? Because if they continually state this over 10 years every 6 months or so it is very likely that they will eventually be able to say “I told you so.” Let’s stay with the bull and be on the alert for dips.

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