Friday, September 21, 2012

Everyone is now into Dow Theory

One tenant of Dow Theory is that stock market averages must confirm each other and so we need the Dow Transports to confirm a new high or low posted by the Dow Industrials. Keep in mind that Dow did not state a time period for the confirmation to occur. According the Wikipedia, Charles H. Dow stated a bull market in industrials could not occur unless the railway average rallied as well, usually first. According to this logic, if manufacturers' profits are rising, it follows that they are producing more. If they produce more, then they have to ship more goods to consumers. Hence, if an investor is looking for signs of health in manufacturers, he or she should look at the performance of the companies that ship the output of them to market, the railroads. The two averages should be moving in the same direction. When the performance of the averages diverge it is a warning that change is in the air.

Today most of us know – thanks to the business media that so far this year the Transports have not followed the Industrials on to new 52-week highs. Now back in Dow’s time the Transports did not contain truckers and airline stocks and today it is not unusual to get performance divergence between the rails, the truckers and the airlines. A look at two important railroads make me wonder what all the fuss is about – both are still in linear up trends. Keep an eye on FDX and UPS to see if they can recover back to their 40 week MAs over the next several weeks. If that does not occur then I may have some concern

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