Dow Theory

I’ve talked about (ridiculed) the Dow theory in these pages before so it won’t come as a surprise if I do it again. The reason for this is that in one day on two different Blogs I read about the almighty Dow theory and I think the author’s were serious.

But everyone is entitled to his or her opinion and just because it used to work when transportation meant rail and steamship doesn’t mean that it shouldn’t translate neatly into the 21st century – right? Because let’s face it when the principle means of transport these days is digital and there are no digital carriers in the transport index that doesn’t mean that the thing is bogus – does it? Course not - sweet cheeks – don’t trouble your little head over it.

Well here are the two indices rendered in Marlyn’s curve (which is nothing more than averaged normalized prices) –



Let me walk you through it. This is the weekly INDU and TRANS indices for the last 150 plus a couple of weeks. That’s about three years or so. At point “A” which was back in 2004 the transports took off and the industrials lagged by a good 3 months. In other words there was a ton of activity in the transports before there seemed to be activity in the industrials. But this is not a problem – product is shipped before it is paid for but transport is paid for right away so it makes sense that the transports would be leading the industrials.

But then in July of 2005 (B) they kind of synced up again – which if we expect the transport to lead the industrials didn’t seem to happen. Then in August ‘06, (C) right in front of the industrial’s record breaking run the transports were lagging. In other words the industrials managed to make a ton of profit without shipping anything. Maybe that’s what’s wrong with our economy. Or maybe the shippers shipped for free to help the economy out. Or maybe … I don’t know. Who are you going to believe, me - or your lying eyes?

At the current time on the weekly basis at least both indices are going up. Which brings me to yet another rant – if you are going to predict the future over the next several weeks or months using the daily closes is about useless. At least use weekly data for month out predictions and monthly data for year out predictions. Then you might have a shred of credibility in your predictions. But I will say this - I do see on the chart the INDU starting to lose a little momentu and maybe even lean a bit. It is awfully high. Wouldn't surprise me a bit to see a little drawback here.

But remember - I never predict - I just go with the flow.

RIP James Brown - you made me feel like dancin'