Tags: Dow | theory | Transports | Industrials

Why Stocks Will Rally in 2013

By Sean Hyman   |   Monday, 24 Dec 2012 07:38 AM

Stocks are going to continue to rally in 2013. How do I know? There are a few things that Charles Dow, founder of Dow Jones & Co. and The Wall Street Journal, found to be true of the stock market after having studied market movements for a very long time.

In a nutshell, there are six tenets of the Dow theory. They are:

1. The market has three movements: a primary trend lasting for less than a year to several years, an intermediate trend lasting from 10 days to three months and a short-term trend that varies from hours to a month or more.

2. Market trends have three phases: accumulation phase, trend-following phase and the distribution phase.

3. The stock market discounts all news.

4. Stock market averages must confirm each other.

5. Trends are confirmed by volume.

6. Trends exist until definite signals prove that they have ended.

Now I won’t go into all of these tenets. That’s not the purpose of this particular blog, but if you’d like to delve into that further, you can Google “Dow theory” or put those words into Wikipedia and find out more on the overall theory.

The purpose of this blog is to focus on tenet number four. For it’s in that one that I know that 2013 is going to be an “up” year for stocks overall.

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Tenet number four says that stock market averages must confirm each other. By that, Charles Dow meant that the Dow Jones Transportation Average needed to go up right along with the Dow Jones Industrial Average. Why is this so important in confirming a trend?

You see the Industrials make the products and goods that consumers need. But the transports ship these goods to the retail locations, or from an online company’s warehouses to your doorstep.

Therefore, if the industrials are going up, but the shippers of those goods aren’t benefiting, then the trend in the industrials is not likely to be sustainable.

You see, before the retailer gets their product and sells it and makes a profit, the shipper must first get it to them and make their profit first.

So the retailer pays the shipper to send them their products. Then the retailer gets it in their store and then sells it and makes their profit.

Therefore, if the transportation companies aren’t profiting and increasing their earnings, which would boost their stock prices, then the sustainability of any rally in the Industrials is in question and likely unsustainable.

Well, for the last nine to 10 months, the Dow Transports have been treading water sideways. But just last week, they broke out of their sideways consolidation to the upside.

This would only happen because the shippers of goods (transportation companies) are starting to make money again and commerce is starting to flow more around the nation once again. That is a good sign.

Editor's Note: Should Obama and Congress Raise Taxes? Vote Now.

So now that BOTH the Dow Transports and the Dow Industrials are moving higher, I believe it shows us that we’ll see a sustainable trend that lasts at least well into 2013.

This also shows that the business/economic cycle is turning upward, which is bullish for the economy. And it’s also likely the initial proof that large emerging markets like China and India are turning up again and pulling the global economy upward once again.

So how can this all be taken advantage of? I would say there are several ways.

The most obvious thing is to look through the stocks that are contained within the Dow Jones Transportation Average and see which ones look good to you from a fundamental and technical standpoint.

The average contains trucking companies, railroad companies, delivery-service companies and airfreight companies.

You can Google for a list of these companies, but to give you an example of some of the most well-known names within the transports, you will find companies like FedEx, UPS, Delta Airlines, Southwestern Airlines, JB Hunt, Ryder, CSX Corp. and Norfolk Southern.

Another way is to buy a transportation exchange-traded fund (ETF) or the very broad-based Standard & Poor’s 500 ETF.

In my Ultimate Wealth Report, I will be picking individual stocks that are some of the most solid companies fundamentally, but that are trading at a discount to their earnings relative to the overall market, and that are at turning points technically on the charts.

In my newsletter service, we’re beating the S&P 500, gold, oil, the Commodity Research Bureau (CRB) Commodity Index and “real-life” inflation. So if you’d like me to do all the research and number crunching and tell you what I believe are the best investment-worthy assets to invest in, then come join us at www.seecurrencywars.com.

About the Author: Sean Hyman
Sean Hyman is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He is also the editor of Ultimate Wealth Report. Discover more by Clicking Here Now.

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