Dow Theorists Cheer Them On

Are the airlines signaling a new bull market surge?

Fresh gains in airline shares Monday helped lead the Dow Jones transportation average to a record high, as the index jumped 46.92 points, or 1.4%, to 3,463.17.

If the Dow Jones industrial average, which closed off 8.97 points at 8,180.52 on Monday, can soon top its previous record of 8,259.31 set Aug. 6, a concurrent new high by the transports index could be a bullish sign under the “Dow Theory.”

That theory, developed by Charles Dow about 100 years ago, holds that it’s generally a positive sign for the market overall when the Dow industrials and Dow transports are hitting new highs together.

On the other hand, new highs by one index, while the other struggles below its previous highs, have often heralded the breakdown of a bullish market trend.

Why care what the transport stocks are doing vis-a-vis the industrials? Decades ago, the transports (especially the railroads) were viewed as bellwethers for the economy: If the stocks were rising, it suggested rebounding economic activity.

Whether the Dow transports index still is useful as an economic or market indicator--or any more useful than any other indicator--is debatable. But veteran investors still like to see the two Dow indexes moving to new highs together.