Dow Theory – Again? – Yes – Again!

In the ever-shrinking world of “are we there yet” the answer is always a resounding “no” and “I told you to go before we left.” But that aside there are people out there who still adhere to the Dow Theory. That theory insists that the transportation index has to confirm the Industrial index in a “you complete me” kind of way. Sort of the way dysfunctional relationship’s work – (or, for that matter, most relationships). And the cult of Dow probably wants to burn me at the stake - but I’m not buying it.

The way I look at it the Dow theory in the last 16 years or so has exactly predicted 5 of the last 1 collapses of the Industrials. And that one is iffy at best.

Here you can see for yourself. I’ve scribbled all over this picture to show my utter contempt for a theory that was worn out in the 40’s but still has true believers today



As you can see the Trans index is once more seeming to signal impending doom for the Industrials – will it really happen this time or … stay tuned.

But it is the 50-year that best tells the story that I want to get across to you – the EMA 4 very seldom dips below the EMA 21 on the quarterly charts(which means, of course that the price very seldom does either) and once it comes back up for air – it seems to stay on top for a lonnng time.



For those of you with a short attention span - here is the last 50 years of the Industrials.

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'

Dow Theory

The Dow theory is simple as can be - whither the transportation index there the Industrials. In other words one doesn't move without the other and if they do the earth stands still and everything that we know and love turns to ....

Not so. In general the tranny's and the indu's track together and play nice and as the following chart shows for the past two years that only two times on a global basis did they diverge - once briefly, box a, and once tremendously, box b.



I know, I know what you are saying to yourself right now - "where in the hell does he get such ugly colors," but seriously, can we be serious for a moment -

As shown in box a when the INDU's realized that the TRAN's were going up they rushed to catch up. But box b is most interesting because this was what was happening that many of the bobbleheads and blogheads (many instances same difference) were talking about this past summer - you know as the Dow was making a run at a new record how - "The trannies are crashing! The trannies are crashing! The world as we know it must come to an end." And it didn't.

Point being kiddies who're ya gonna trust - the bobbleheads or your own lying eyes?

Stop worrying about things like the Dow theory - it obviously doesn't work as some folks want it to. It might have used to done that back when buggy whips were all the rage but apparently in the age of microsoft it don't work that way so much no more. And despite the horrendous grammar - you get the point.