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http://www.bloomberg.com/apps/news?pid=10000103&sid=aJIYgNLR2zis&refer=us
<<`Dow Theory' Sends Signal for Further U.S. Gains: Taking Stock
Dec. 23 (Bloomberg) -- Two days ago, the Dow Jones Industrial Average reached a three-year high and the Dow transportation average set a record. To Kenneth Tower, the combination suggests the U.S. stock market's 21-month rally will last into next year.

``As part of putting together a forecast or an outlook for the next few months, it's a very encouraging and positive sign,'' said Tower, chief market strategist at Charles Schwab Corp.'s Cybertrader Inc. in Princeton, New Jersey.

The conclusion reflects a signal sent by ``Dow Theory,'' named for the developer of Dow Jones & Co.'s averages, Charles H. Dow. According to the indicator, U.S. stocks may rise further because the industrials' new high coincided with a similar move in the measure of airlines, railroads, shippers and truckers.

The Dow industrials closed on Dec. 21 at 10,759.43, the highest since June 2001. The transportation average climbed on the same day to 3792.09, exceeding a record set in May 1999. Yesterday, the industrials added 0.5 percent and the transportation-stock gauge slipped less than 0.1 percent.

Stocks started to rally in March 2003 as the economy and corporate profits accelerated and U.S. forces invaded Iraq to oust Saddam Hussein. The Dow industrials have risen 37 percent since then and the transportation average has jumped 66 percent.

The Dow Theory signaled the beginning of a bull market in June 2003, when the averages surpassed their peaks in the fourth quarter of 2002, said Charles Carlson, a fund manager at Horizon Investment Services in Hammond, Indiana. His firm publishes the Dow Theory Forecasts newsletter.

`Favorable Condition'

Having both the benchmarks reach new highs is a sign of strength in the U.S. economy, according to the Theory, because industrial companies produce goods and transportation companies ship them to consumers.

``As long as they are in gear, as they are now, it says everything looks okay,'' said Richard McCabe, chief market analyst at Merrill Lynch & Co. in New York. ``It indicates a favorable market condition.'' McCabe was the No. 3 technical analyst in Institutional Investor magazine's 2004 survey.

The Dow transportation average, made up of 20 companies, has rallied 26 percent this year. J.B. Hunt Transport Services Inc., the second-biggest U.S. trucker, and Yellow Roadway Corp., the largest, led the advance.

J.B. Hunt's shares have surged 64 percent this year and Yellow Roadway's have risen 54 percent. Both truckers said they increased prices because demand rose faster than their ability to deliver cargo.

Drug Stocks' Slide

The Dow industrials, whose 30 members include financial and retail companies as well as manufacturers, has added 3.5 percent in 2004. McDonald's Corp., the world's largest restaurant chain, has the largest gain. The company's shares have risen 31 percent as a streak of monthly sales increases reached 18 months.

Declines in two drugmakers limited the average's advance. Merck & Co., which pulled the Vioxx pain medication in September after a study showed it increased the risk of heart attacks, has dropped 30 percent. Pfizer Inc., whose Celebrex painkiller was linked to similar risks in another study, has lost 27 percent.

Having the Dow industrials reach a new high this week eliminated a source of concern for followers of the Dow Theory, including Horizon's Carlson.

``When one is doing well and the other one isn't, that type of divergence can dictate there is a problem or dislocation in the economy that will ultimately result in unfavorable stock prices,'' he said. ``The divergence has been resolved.''

`It's Reconfirmation'

Economic reports this week suggested growth can be sustained. The Commerce Department increased its estimate of third-quarter U.S. economic expansion to a 4 percent annual rate as consumer spending reached the fastest pace in three years. A gauge of leading economic indicators rose in November for the first time in six months, according to the Conference Board.

This week's moves in the Dow averages bolster optimism triggered by last year's ``buy'' indication and suggest that stocks can extend their gains, Carlson said.

``New highs in the industrials and the transports happening on the same day sends a stronger signal,'' he said. ``It's not a new bull market; it's reconfirmation.''



To contact the reporter on this story:
Danielle Sessa in New York at [e-mail].

To contact the editor responsible for this story:
Scarlet Fu in New York at [e-mail].>>