Stock market record highs defy Dow Theory indicators

• Stock market highs have yet to be confirmed by indicators that are more than 100 years old.
• Although the Dow Transportation Index has not reached a new all-time high, the Dow Jones Industrial Average has reached a new all-time high.
• According to Dow Theory, both indexes need to move in tandem to support a bull market in stocks.

The stock market’s record high has not yet been confirmed by the Dow Theory, a more than 100-year-old indicator.

While the Dow Jones Industrial Average has been hitting new highs for the past two weeks, the Dow Jones Transportation Average is still trading 9% below its all-time high. The theory is that if both are rising in tandem, it provides a bullish signal for stocks.

The current divergence between the two major stock market averages represents a tactical risk for U.S. stocks in 2024, according to a recent note from Bank of America.

“While the Dow Theory has maintained a bullish signal since mid-July, this bearish divergence is creating an unconfirmed situation and suggests that 2024 will be a “This poses a tactical risk for U.S. stocks entering the market.”

The idea behind the Dow Theory is that when the economy is strong and consumers are buying goods, transportation companies are tasked with transporting those goods, which are essential to continued economic growth. The company should also be doing well. This theory was created by Charles Dow and is based on hundreds of his editorials published in the Wall Street Journal over 120 years ago.

Transportation stocks are considered a leading indicator of the stock market and economy, so a continued decline in the Dow Jones Transportation Average is a red flag. If transportation companies’ growth slows and their stock prices fall, it could be a grim warning for the rest of the economy and the stock market.

The two main components of the shipping average are FedEx and UPS, and both companies have had a weak business outlook in recent months.

For the Dow Theory signal to confirm the bullish break in stocks over the past few weeks, the Dow Transportation Average would need to rise about 10% to close at a record high. On the other hand, if the slump in transportation stocks continues, it could hinder the overall market’s rise.