Dow Theory: Unequivocally Bullish

09/27/2013 10:00 am EST


Richard Moroney

Editor, Dow Theory Forecasts

Dow Theory Forecasts has been published for over six decades. Editor Rich Moroney explains the goals of the service and the Dow Theory timing strategy, which recently confirmed its latest bull market signal.

Steve Halpern: We're here today with Rich Moroney. How are you doing today, Rich?

Rich Moroney: Good, good. Good to be with you.

Steve Halpern: Your newsletter, Dow Theory Forecasts, is widely considered to be among the nation's most prestigious financial services. In fact, having been published since 1946, it's also one of the oldest investment newsletters. Could you tell our listeners a bit about the history of Dow Theory?

Rich Moroney: Sure. Yeah, the newsletter, as you mentioned, originally started in 1946 by Leroy Evans. His son Bob still owns the company today.

Leroy Evans was a steel executive who got really interested in the stock market, and really interested in the Dow Theory, and started publishing a newsletter for, kind of, close associates, and then just kind of kept snowballing all through the 60s and 70s, and still today, it's among the most widely read investment newsletters in the nation.

I joined the company in 1989 and became editor in 1994. In 2000, we introduced our Quadrix stock rating system, which looks at stocks the way we've always looked at stocks at Dow Theory Forecast, that is, growth at a good price.

But it brought a more quantitative rigor. We rank about 4,000 stocks based on six categories to get a Quadrix overall score, and the results have been quite good.

Dow Theory Forecast is among a select group of newsletters that outperformed over the last 10 and 15 years according to the Hulbert Financial Digest, and our focus list, which represents our very best picks for year ahead gains, has outperformed since Hulbert began following it at the end of 1995, and that's despite having lower risk than the market.

Steve Halpern: Now, correct me if I'm wrong, but for the history of Dow Theory Forecasts, you've really had a focus on high-quality, long-term investing, as opposed to a trading mentality. Is that the case?

Rich Moroney: Yeah, that's still the case. Like I said, we're kind of focusing on growth at a good price. We're looking for high-quality companies that have sales momentum, earnings momentum, good track records, good balance sheets.

But we don't want to pay too much, so it's kind of a balancing of getting as high-quality companies as you can, but try and buy them at a discount, try and buy them, oh, and for some reason, we think there's the potential for positive surprises.

Steve Halpern: Now, the name of the newsletter comes from what's called the Dow Theory, which is a long-term market timing system that was developed by Wall Street Journal publisher Charles Dow. Could you share a brief overview of this system and how you incorporate that in your market outlook?

Rich Moroney: Sure. The Dow Theory is a method of putting market moves in context, and basically under the Dow Theory, you want to see both the Dow Industrials and Dow Transports reaching significant highs.

When both those averages are reaching significant highs, the primary trend is considered bullish and the odds favor higher prices ahead so significantly under the Dow Theory. Just last week, on Wednesday, both the Dow Industrials and the Dow Transports went above the highs reached in early August. With both averages reaching all-time closing highs, the Dow Theory is unequivocally in the bullish camp.

Basically you're looking for confirmation. The idea is that the majority money opinion doesn't always get things right, but it tends to get things right, and when it has doubts, you can see that in the averages, and basically how do you see it when both are reaching new highs? You take that as a verdict that the majority money opinion is bullish.

When there's divergence, one going to new high and one not for a sustained period, that kind of raises a yellow flag, suggests the majority money opinion is undecided, and when both are going to new lows, significant lows, that's suggests the trend is bearish and lower prices are likely.

Steve Halpern: Now, is it unusual for the stock market to pull back over the short-term following a confirmation of new highs?

Rich Moroney: No, that's what we've seen since Wednesday and it's not all that surprising. You tend to use up a lot of the market's buying energy getting to a new high.

There sometimes is resistance at those levels, and it kind of depletes the market's momentum a little bit to bust through, and then you sometimes do get this kind of give-back.

It's a little unusual, clearly, to have an event like Wednesday's, where the Fed is widely expected to do something and then they don't, and you get the market going to new highs, and since then, you've seen the averages kind of tail-back, and not really significantly.

But it is kind of interesting that that verdict that was seen in the averages, and which we do see as a valid signal, clearly Wall Street is having some second thoughts about what exactly the Fed meant by that Wednesday decision.

Steve Halpern: With the recent confirmation of new highs in both the Industrials and the Transports, as a result of that, you would suggest that long-term investors have close to a fully invested position now?

Rich Moroney: Yeah, I mean, we've been in the bullish camp for some time now and I would continue to remain in the bullish camp. Our buy lists have 94% to 98% in stocks, and the rest is in a short-term bond fund, so we're pretty much fully invested.

Steve Halpern: Well, thank you, we appreciate you taking the time to be with us today.

Rich Moroney: Sure, my pleasure.

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