There was a great deal of interest in my recent post Dow Theory calls a bull market. Readers had many questions on what brought about the Dow Theory bull signal, and specifically whether Richard Russell, Mr Dow Theory and author of the Dow Theory Letters, was the last bear standing when he replaced the bear on the first page of his daily newsletter with a long-horned Texas bull.

Who better to ask for more background on his thinking than the R man himself? The paragraphs below are excerpts from his latest newsletter.

For four frustrating months or ever since the March lows, this writer [Russell] has been in a state of perplexity, better known as confusion. Now, at last the picture has clarified. I would like my subscribers to study the following explanation carefully. I'm going to explain why the trend of the stock market has turned clearly bullish under Dow Theory. The fooler was that this pattern did not occur immediately off the March lows - but it took place part-way up the rally and four months after the March lows.

Please, refer to the charts of the Industrial and Transportation Averages below.

(1) The Industrials (top chart) recorded a low in May at 8230.

(2) The Transports also established a low in May at 2971.

(3) Next, both Averages rallied to June peaks, the Dow to 8877 and the Transports to 3434.

(4) Both Averages then turned down, with the Dow breaking support and declining to 8087. But important - note that the Transports held support and did not confirm the Dow weakness.

(5) After the Transport non-confirmation, both Averages rallied, and both Averages broke out above their June peaks.

This was a classic Dow Theory bull market signal! To review - we saw the two Averages decline with one Average (Industrial) breaking to a new low while the other Average (Transports) refused to confirm. Next, we witnessed a rally with both Averages breaking out to new highs.

Note - Both Averages are now overbought, based on the level of the RSI.





The trend of the stock market is now bullish. But this is where interpretation is critical.

Nowhere during 2008 or 2009 did we see anything typical or characteristic of a major bear market bottom. However, recently we witnessed a Dow Theory bull market signal. My interpretation? We are now in a cyclical bull market as opposed to a secular or primary bull market. In effect, we're in an extended bear market rally. The true bear market bottom lies somewhere ahead.

There is no way of knowing how high this bear market rally might carry. The question - is it worth playing this cyclical bull market? My answer is yes, but play it very conservatively and carefully.

And that is the word according to a long-timer that has spent more than half a century following the ticks on the tape.

As an aside, I have been subscribing to the Dow Theory Letters for more than 26 years and highly recommend them for the stimulative nature of the content.