What Is The 'Dow Theory Buy Signal' And Why Should Investors Care?

The classic "Dow Theory buy signal" isn't a tell-all sign of market direction, but it is closely watched by many professionals. The theory holds that if transportation stocks move higher than the broader market will follow suit, Matt Maley, an equity strategist at Miller Tabak explained during a recent CNBC "Trading Nation" segment.

Shares of the Dow Jones Transportation exchange-traded fund, iShares Dow Jones Transport. Avg. (ETF) IYT has lagged the overall market for most of 2017 but has recently caught up and remains within striking distance of the 52-week highs of $174.72. This is encouraging for the broader market since the transport industry includes airlines, trucking, railroads — sectors that perform better when consumers are buying more.

"It's a good indicator for what's going on in the economy as a whole, especially for the consumer," Maley said.

While the entire sector is showing signs of momentum as of late, airline stocks stand out and look attractive as investors are focused on the group's long-term potential instead of recent concerning headlines. On the other hand, investors should wait to take advantage of the surge in e-commerce which translates to an increase in on-ground parcel deliveries.

"If for some reason these stocks start to roll over in any significant way, that's going to be a warning signal that the consumer is starting to pull on their horns," he said. "As good as the transportation stocks look right now, the new all-time highs they're making are only slight ones. So, we'd like to see a little more upside follow-through before we jump in with both feet."

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