Analyst: This is how you’ll know when to get out of stocks
From Nick Rokke, Analyst, Palm Beach Daily:
Today, I’m going to tell you about a 120-year-old investment theory that’s telling us to buy stocks right now.
Modern investors who followed this simple strategy captured gains of 138%, 47%, and 114% in the bull markets of 1995–1998, 2003–2007, and 2009–2015, respectively. These same investors are also up 11% in the current upturn… and this tried and trusted stock market signal says there’s more room to run.
But that’s not all…
This theory also warned investors to get out of the market before the tech wreck in 2000. And it got them out of the market in 2008, right before the financial crisis.
It even got them out in 2015 when the market went nowhere for two years.
But right now, this simple investing theory says “buy.”
The Dow Theory Buy Signal
In 1889, Charles Dow’s publishing powerhouse—Dow Jones & Company—launched The Wall Street Journal. That alone would have been enough to secure Dow’s spot in the history books.
But he’s more well-known for creating the world’s most iconic market index—the Dow Jones Industrial Average.
Dow was a trader. And he used his index as the basis for an investment strategy that still works today: Dow Theory.
It’s very simple. Dow Theory compares the action of the Dow Jones Industrial Average (big manufacturing companies) with the less popular Dow Jones Transportation Average (big companies that transport goods).
When both indexes are in a confirmed uptrend, Dow Theory says you should buy.
A confirmed uptrend means both indexes need to have set a 52-week high. And they need to have set at least one low point that is higher than the previous low.
The theory goes that when these two things happen, the economy is running on all cylinders. Manufacturers are making stuff and transportation companies are shipping it.
Even though less of our economy is based on manufacturing and shipping today, this indicator still works… It has withstood the test of time.
And right now, industrials and transports are both making higher highs… while also setting higher lows… confirming their uptrends.
The chart below shows how Dow Theory has played out over the last 25 years. The green boxes show when the Dow Jones Industrial Average and Dow Jones Transportation Index are in a confirmed uptrend, while the blue line shows the market.
As you can see, Dow Theory would have had you buying during the big run-ups and selling during the big drawdowns.
What’s more, Dow Theory would have gotten you out of the markets during the 2000 and 2008 market crashes as well as the downturn at the end of 2015. And it would have saved you from jumping out of the market prematurely during the short-lived correction in 2011.
The system isn’t 100% perfect, though.
It got you out of the market a little too early in 1998. So you would have missed out on some of the gains. More importantly, though, you would have missed all the losses.
Our Advice Stays the Same
With both indexes hitting new highs this week, Dow Theory says the economy is firing on all cylinders… the markets are healthy… and we are going higher. You won’t hear that in the financial media because it’s the truth.
Looking past all the doom and gloom to find the real story is our mission here at the Daily. Continue to ignore the doomsayers and buy stocks… It’s a bull market.
Nick Rokke, CFA
P.S. My colleague Teeka Tiwari has uncovered an asset that’s even more bullish than the stock market. They’re called cryptocurrencies. And it’s the only market in the world right now that gives you a realistic shot of making 30 times your money. Teeka’s readers have made 22.9%, 195.7%, and 230.8% profits in 90 days off cryptocurrencies. And Teeka thinks you could make even bigger profits starting now. You can learn more here.