Posted by Adam Turnquist, CMT, VP Chief Technical Strategist
Friday, December 15, 2023
Key Takeaways:
- The Dow Jones Industrial Average (INDU) has gone from correction to record highs in only 32 trading days. Broadening participation predicated on falling interest rates and signs of a soft-landing scenario have underpinned the recovery.
- What happens after a record high? Over the last 100 years, and filtering for record highs occurring at least three months apart, upside momentum has historically continued. The INDU has generated an average 12-month forward return of 11.1% after posting a new record high, with 71% of occurrences producing positive results.
- And with the INDU already at record highs, all eyes are now on the Dow Jones Transportation Average (TRAN) to confirm the breakout, per Dow Theory.
- LPL Research views the INDU’s recent record-high rally as another piece of evidence supporting the health and sustainability of the current bull market.
It only took 489 trading days, but the INDU climbed back into record-high territory this week. Broadening participation in the equity market recovery has lifted the index 15% above its recent October low and above the prior January 4, 2022 record high of 36,800.
While the INDU has become obsolete as a benchmark for portfolio managers due to its price-weighted methodology, its long history and blue-chip components still make it a relevant index to watch. Furthermore, the INDU is a little more balanced with sector weights than the tech-heavy S&P 500, as financials, health care, technology, and industrials each hold around a 15–20% weight within the index.
The INDU is also a key component of Dow Theory — a technical framework dating back to the early 1900s that is generally used to define market trends. Charles Dow, co-founder and editor of the Wall Street Journal, is credited with the original theory.
One of the tenets of Dow Theory is that the averages must confirm each other, simply meaning breakouts and breakdowns in the INDU and TRAN should happen in concert. Conceptually, Charles Dow observed in the late 1800s that raw materials would need to be transported via railroads before economic expansion could begin. Subsequently, robust rail activity would typically portend favorable economic conditions for industrial companies.
With the INDU already at record highs, all eyes are now on the TRAN to check the box for a Dow Theory buy signal (the averages must confirm each other).
What Happens After a Record High?
While record highs are great, the next question, of course, is what happens next, especially for those investors who may have missed the rally. Using history as a guide, we found that over the last 100 years, upside momentum continued after the INDU registered a meaningful record high, defined by record highs occurring at least three months apart. As illustrated in the table below, the INDU has generated an average 12-month forward return of 11.1% after posting a new record high, with 71% of occurrences yielding positive results.
Summary
While the INDU’s price-weighting methodology limits its use as a portfolio benchmark, the index’s long history and blue-chip components still make it a relevant benchmark to watch. LPL Research views the INDU’s recent record-high rally as another piece of evidence supporting the health and sustainability of the current bull market. A breakout on the TRAN index would further support the bull case and check the box for a Dow Theory buy signal. Finally, history suggests that record highs are typically followed by continued upward momentum. Or as veteran technician Stan Weinstein said, “Whenever a breakout occurs with a stock moving into virgin territory (it’s never traded there before), this is the most bullish situation you can buy. Think about it. There isn’t one person who is long and has a loss.”
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