The long-awaited Dow Theory bull market signal finally arrived yesterday. This came about as a result of the Dow Jones Industrial Average and the Dow Jones Transportation Average both breaking through their previous rally peaks (registered on 12 and 11 June respectively).

The charts are shown below.

23-july-09-1

Source: StockCharts.com

23-july-09-2

Source: StockCharts.com

Although the breakouts provide confirmation of the nascent uptrends, one may question the relevance of the Averages as representative benchmarks in the modern economy. Also, most indices are quite overbought after very sharp moves over the last 12 days.

In my opinion, it could be dangerous to blindly put one's faith only in Dow Theory and investors should at all times rather base their decisions on a combination of fundamental and technical indicators.

While Dow Theorists delight in the bull signal, it is appropriate not to lose sight of the economic picture, as aptly summarized by David Rosenberg, chief economist and strategist of Gluskin Sheff & Associates: Well, the S&P 500 surged 15% in the second quarter and what we did was go back in the history books to see what happens to the economy the very next quarter typically after such a big bounce and the answer is ... just over 3% real GDP growth. So consider that de facto what is being discounted at this time for current quarter growth - it better be a humdinger of an inventory build.

Now, for the market to build on such a rapid advance in the current quarter, history again suggests that we would need to see 5.5% real GDP growth, which we give near-zero odds of occurring. Hence our call for a sputtering stock market through year end. Too much growth - and hope - are priced in at this point.

Richard Russell, author of the Dow Theory Letters, yesterday replaced the bear on the first page of his daily newsletter with a long-horned Texas bull, saying: We follow the Averages blindly (via Dow Theory) the way a blind man follows his seeing-eye dog.

We live in interesting times indeed!