Some Thoughts on Dow Theory and the Current State of this Bull Market

The bull market rolls on. New highs in some important sectors and ratios this week confirmed that:

• Seven-month highs in financials relative to the S&P 500 ($XLF:$SPY).

• Seven-month highs in stocks relative to U.S. Treasury bonds ($SPY:$TLT)

• Stocks relative to commodities hit the highest levels since May 2010 ($SPX:$CRB)

• All-time highs in the retail sector ($RTH)

However, with new 52-week highs in major indexes like the S&P500, Dow Jones Industrial Average and decade-plus highs in the Nasdaq Composite, we have not seen new highs from the Russell 2000 and Dow Transports.

The Dow theorist bears have been doing back flips over the last couple of weeks as the Dow Jones Transportation Average has not made new highs, while their Dow Industrial counterparts continue higher to multiyear highs.

Dow Theory states that when one of these two averages breaks resistance and makes new highs, the other one should as well. In other words, goods and services don't just need to be made, but delivered, too. According to the 100-plus-year-old Dow Theory, which I don't put too much weight on in 2012, the lack of confirmation by the Transports is a bearish omen.