Dow Stage 3 as Industrials set a new high

By Colin Twiggs
October 20, 2017 10:30 p.m. EDT (1:30 p.m. AEST)

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Stage 3 of a bull market is normally identified by excessive speculation and the appearance of inflationary pressures according to classic Dow Theory. Neither of these are evident, so why stage 3?

Prices are advancing at a faster rate than earnings, as they did in the Dotcom bubble of the late 1990s. Stage 2 is synonymous with prices advancing in line with earnings, as in 2011 to 2014 on the chart below. But the index then continued its advance while earnings retreated, commencing stage 3.

S&P 500 and Earnings per Share

The earnings recovery is forecast to continue in 2018 but, if the last three quarters are anything to go by, forecasts are likely to be revised downward as the reporting season approaches.

S&P 500 and Earnings per Share Forecasts

The Dow broke 23,000 for the first time this week, logging an impressive 260% gain since its March 2009 low. Apart from the occasional setback, like General Electric, most stocks are meeting or exceeding expectations and further growth is likely.

Dow Jones Industrial Average

The Transport Average is also making new highs after a sharp down-turn in 2015/2016.

Dow Jones Transport Average

Dow Jones World Index displays similar growth, reflecting a broad recovery.

Dow Jones World Index

Stage 3 is likely to continue until earnings falter.

They say there are two sides to everything. But there is only one side to the stock market; and it is not the bull side or the bear side, but the right side.

~ Jesse Livermore


Colin Twiggs is director of The Patient Investor Pty Ltd, an Authorised Representative (no. 1256439) of MoneySherpa Pty Limited which holds Australian Financial Services Licence No. 451289.

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