Dow Theory still sends buy signals

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Updated: August 4, 2011 4:20PM

People know the Dow Jones industrial average and the Dow sector indexes, but most don’t pay attention to Dow Theory. Its adherents combine technical analysis with street sense to conclude that trends in sector stocks tell you where the broader market is headed.

For example, the Dow Jones transportation index is near its all-time high, despite losing 1.3 percent Friday. This index covers shippers such as railroads and air freight companies, and the theory holds that upward movement in the index bodes well for the producers of the goods being shipped.

“Transportation has become a barometer of the whole global industrial economy,” said Richard Moroney, vice president of Horizon Investment Services in Hammond, Ind., and editor of the newsletter Dow Theory Forecasts.

Moroney said Dow Theory holds that the market will rise. “The trend is up until it’s proven otherwise,” he said, “and now we’re just monitoring for worrisome signals.”

He said a favorite sector is large technology companies that he sees as being in a “sweet spot” of sustainable growth. His selections include IBM (IBM), Oracle (ORCL) and DirecTV (DTV).

But before you head off to buy blue chips, know that Moroney also believes that many of those stocks have gotten pricey. Skip Caterpillar (CAT) and go for a lesser-known outfit such as Dover (DOV), Moroney said.

FUTURES TENSE: Could it be that investor restlessness is generating a little heat for the leadership of CME Group (CME), the owner of the Chicago Board of Trade and the Chicago and New York mercantile exchanges? In late 2007, the stock hit $700 and even diehard traders who owned it would agree that was too high.

The brutal year of 2008 sent the shares tumbling to less than $200. But for around two years, the highly profitable company — with margins of about 37 percent — has been dead money for its investors. The stock has been unable to hold any level above $300 and closed Friday at $294.36.

Perhaps to head off complaints at a June 8 annual meeting, CME’s board Monday authorized a $750 million share buyback over the next 12 months. It’s one way for a company to say it believes in itself.

Volatile commodity markets have spurred trading, but analysts at Keefe, Bruyette & Woods said volume growth at CME and other exchanges is leveling off. They have a target price of $337 on CME, but many other analysts think it is worth $350 or more.

STALKING CORN: CME has proposed raising the daily price limit on corn futures at the Chicago Board of Trade, where volatility increasingly has caused markets to seize up. It has proposed a 40-cent per bushel daily limit vs. the current 30 cents. CME said corn futures settled at the limit bid or limit offer price 36 times during the first quarter, the same number of cases as for all of last year. The Commodity Futures Trading Commission must approve the change for it to take effect.

THE MAY FACTOR: I wrote in last week’s column about the rationale behind the “sell in May” approach to stocks, which holds that the six months from May to November are the weakest time for the market. Since then, I received data on the topic from Ibbotson Associates, the market analysis firm that’s part of Morningstar and the company that is the gold standard for historical information.

Ibbotson said from January 1926 through April 2011, if you sold on the last days of April and bought on the first day of November, you would have had an average annual return of 13.1 percent.

If you bought and held, the average annual return would be 9.9 percent.

And holding only from May through October produced an average annual return of 6.9 percent.

But “sell in May and go away” is still more practical for heavy traders than for casual investors. Taxes, commissions and emotionalism all take their toll.

BLAIR’S FLAIR: William Blair & Co. is out with its latest “better values” list, stocks its analysts believe will outperform the broader market over the next two years. I pay attention to this because Blair has an excellent record of beating the market with these lists, which it issues every two or three months.

On the latest list are: Qualcomm (QCOM), TJX Cos. (TJX), Fastenal (FAST), Harley-Davidson (HOG), NII Holdings (NIHD), Interpublic Group of Companies (IPG), Trimble Navigation (TRMB), Solera Holdings (SLH), Valmont Industries (VMI) and Volcano (VOLC).

Never heard of a company called Volcano? It’s a medical device firm that Blair said is focused on the “percutaneous coronary intervention market.” I’ll take its word for it.

Meanwhile, in further evidence that the best thinking on Wall Street is usually not ON Wall Street, Chicago-based Blair finished tied for second in the Wall Street Journal’s latest count of top-rated analysts. Blair analysts won seven awards, tying the firm with Robert W. Baird & Co., which is based in Milwaukee but has a large equity analysis operation in Chicago.

CLOSING QUOTE: “The first myth of management is that it exists. The second myth of management is that success equals skill.”—Robert Heller, British author of management books