On April 4, 2011, we were provided with a Dow Theory confirmation of the cyclical bull market, within a secular bear market, when the Dow Jones Industrial Average exceeded the prior peak of 12,391.25 set on February 18, 2011.
As has been the case throughout this bull market run, the Transportation Average has taken the lead on the way up. This most recent move by the Industrial Average only confirms what the Dow Jones Transportation Average managed to accomplish on March 31, 2011 by closing at 5,299.89. At least for the next month and a half, the economy is expected to continue to grow. What we see from the Transports on the way up we may also see on the way down.
What do the new short-term highs mean for the market overall? It appears to indicate that the Dow Industrials will continue to stagger towards the old high that was established October 9, 2007 at 14,164. For us, a possible leading indicator for the market (even before the Transports) is the price of gold and silver. If precious metals can continue to rise then the Dow has a more favorable chance of rising. However, if precious metals are falling then, in this stage of the interest rate cycle, the general market will have little chance of going up.
According to Dow Theory, all technical indications in the stock market should translate into the economy. Dow Theory was never intended to predict the stock market. Instead, Dow Theory was intended to determine if the prospects for the economy were favorable or not, using the stock market as a leading indicator. The best example of this is in Robert Rhea’s easy to read book, The Dow Theory Applied to Business and Banking.