Dow Triple Highs

As investors we're used to hearing news through the years that the Dow has set a new record high.  But recently we encountered a much more rare record setting day - a Dow trifecta of sorts where all three of the Dow averages hit a high on the same day.

Rare Stock Market Records

Back on February 14, 2007 the Dow Jones Industrial Average, the Dow Jones Transportation Average, and the Dow Jones Utility Average all hit record highs.  The last time that the three averages hit a high on the same day was back in 1998 - nearly ten years earlier.  And since the Dow Jones averages have only been around for about 80 years, this triple high is a pretty rare stock market event.

This particular triple high was fueled by investor reaction to the Federal Reserve's suggestion that interest rates were not going to rise in the short-term.  But the fact that all three averages hit a high on the same day is a testament to the breadth of the stock market's rally.

Dow Triple Highs of the Past

In fact, excluding the Dow triple high of February 2007; there have only been nineteen times in the past that this has happened as illustrated in the following table:

Dow Triple Record Closes

Interestingly, if we take a closer look at the decades in which we had multiple Dow triple highs you might also notice that these decades of widespread market exuberance were also the same decades that we experienced some pretty large Dow setbacks.

For example we had six triple-records occurring in the 1920s - just prior to the stock market crash of 1929.  We also had nine record days in the 1980s - just before the stock market crash of 1987.  So what we are seeing is a pattern of widespread upward movements across the stock market followed by a sharp market correction.

Consequences of Record Highs

We just spoke about one possible consequence of a large number of coincidental record highs - a large market correct.  But how do most analysts feel about this situation?

Most analysts feel that a triple high is a good sign for the stock market.  The fact that all three Dow averages are at record levels indicate that the economy is strong enough to support corporate profitability across a wide array of industries.  And that is a good thing because it means a bull market still has a way to go.  This later point is also supported by what is called the Dow Theory.

Dow Theory

Ever since it was first introduced by Charles Dow; the Industrial Average has been used by various theorists in an attempt to predict future movements in the stock market.  One of these theories is called the Dow Theory and it has to do with the interactions between the Dow Jones Industrials and the Dow Transportations.

The most common version of the Dow Theory goes something like this:

A rise in the Dow Jones Industrial Average must be "confirmed" by the Dow Jones Transportation Average in order for the rise in the market to be sustainable.

This theory is based on the simple relationship that exists between the "industrials" that manufacture products and the "transportations" that ship the products.  An easy to remember this version is that one sector "makes" and the other sector "takes."

In reality these interactions are much more complex than they appear on the surface; however, many investors today still closely monitor the interaction of the industrial and transports.

Final Comments on Dow Triple Highs

So, on the one hand we've got market analysts saying that trifectas are a good sign and that the February 2007 stock market has a way to go since the transportation index has indeed confirmed the Industrial Average's upward movement.  On the other hand we've seen this historical pattern of triple highs followed by sharp market corrections.

Interestingly, as this article was being prepared, there was a fairly large market correction that occurred on February 28, 2007.  On that day, the Dow Jones Industrial Average fell 416.02 points - which was the largest single day decline in over five years.  On a percentage basis, the Dow fell 3.3% that day - the worst performance since March 2003.  Only time will tell if we were seeing the start of a bear market or this bull market still has the ability to continue its climb.

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