One of the oldest methods for anticipating where the U.S. stock market could be headed is making a comeback as the Dow Jones Industrial Average touches a fresh 2023 high.
On Monday, the Dow industrials logged a fresh 2023 closing high, finishing at 34,585.35 after climbing 76.32 points, or 0.2%, according to FactSet data. “Despite numerous warning signals from cross asset analysis, including the still deeply inverted yield curve, Dow Theory, which is one of the most historically accurate strategies to identify the primary trend in the stock market, is now saying the path of least resistance is higher for the first time since April of 2022,” said Tom Essaye, founder of Sevens Report Research and a former Merrill Lynch trader, in a Monday note to clients.
What’s the Dow Theory? Pioneered by Charles H. Dow, one of the founders of The Wall Street Journal and Dow Jones & Co., and the publisher of MarketWatch, the theory states that if two stock-market averages, most commonly the Dow industrials and transport gauges, reach notable new highs within the same short period, then the broader market is likely headed higher.
What is it telling us? Dow Theory is telling investors that the market rally will likely continue as cheaper areas of the market catch up to highflying megacap technology names. Some say this trend already appears to be under way, since the Russell 2000, a gauge of small-cap stocks, and previously lagging sectors like the S&P 500 Industrials Index, have picked up over the last month.