Cohen, Bianco See Biggest Gain Since 1971; Dow Theory Disagrees

What do Abby Joseph Cohen, Jason Trennert and David Bianco know that the Dow Theory doesn't?

The strategists at Goldman Sachs Group Inc., Strategas Research Partners LLC and UBS AG say the Standard & Poor's 500 Index will climb 9.7 percent to 1,600 in the final six weeks of 2007, the steepest gain since 1971.

This month's drop in transportation stocks suggests equities may decline instead. With FedEx Corp. and Ryder Systems Inc. leading the Dow Jones Transportation Average to its lowest level this year, the rest of the U.S. market may slump too, according to the 123-year-old theory that says truckers, railroads and airlines lose business before the economy slows.

``The transports have broken down,'' said Jack Ablin, who oversees about $52 billion as chief investment officer at Harris Private Bank in Chicago. ``We're going to need a boost on the economic front to really help push the market higher. I wouldn't bet on it.''

The transportation average of 20 stocks, created by Wall Street Journal co-founder Charles Dow in 1884 to foretell economic trends, fell last week to the lowest since December. A drop in the 30-member Dow Jones Industrial Average, which Charles Dow compiled 12 years later, below its level on Aug. 16 would signal a bear market is about to begin, the theory holds.

``We've moved one step closer to a bear market,'' said Chuck Carlson, an editor at the Dow Theory Forecasts newsletter who manages $130 million at Horizon Investment Services in Hammond, Indiana.

Buffett's Support

The transport average fell 0.9 percent to 4,563.84 last week, while the Dow industrials climbed 1 percent to 13,176.79 and was 2.6 percent above its Aug. 16 close. The S&P 500, the benchmark for U.S. stocks, advanced 0.4 percent to 1,458.74, lifting its gain this year to 2.9 percent.

Transportation shares rallied early in the year, gaining 19 percent by mid-July. The advance was assisted by Warren Buffett, the billionaire chairman of Omaha, Nebraska-based Berkshire Hathaway Inc.

Berkshire disclosed in May that it owned shares of Union Pacific Corp., the biggest U.S. railroad, and Norfolk Southern Corp. of Norfolk, Virginia, the fourth-largest. The notice came three weeks after the industrial and transportation averages reached simultaneous highs -- bullish under Dow Theory. The S&P 500 advanced to a record in October.
worldtradeinvest.com