Dow Theory, pioneered by Charles Dow, uses two indices – the Dow Jones Industrial Average (DJIA) and the Dow Jones Transportation Average (DJTA). A bull market is indicated when both averages are increasing, while a bear market is indicated when both are decreasing. Dow theory is very good for determining where you are, but it doesn’t give you and idea of where you are going.
Lately the transportation stocks have been on fire. The airlines, railroads, and trucking industry have all been doing well. This is a good indicator that the economy is starting to pick up since when people are shipping things it means that people are buying things.
Several of the trucking stocks and railroad stocks are rated with a Timeliness of 1. (Timeliness is a proprietary Valueline ranking that specifies which stocks they think will do well over the next year. The top 100 stocks have a Timeliness of 1, the next several a ranking of 2, and so on. Average stocks – those that will do about as well as the market – will have a timeliness of 3.)
Most of these stocks have already increased in price a lot, however, so their longer-term prospects don’t look so good. Having gone up a lot over the last few years, these stocks are due to take a breather. Transportation stocks in general tend to be cyclical – increasing in price when the economy starts to do well, then decreasing when things start to contract. This means they are not SmallIvy stocks. We’re looking for stocks that can grow and grow, not stocks that boom and bust.
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.