Wednesday, March 25, 2015

Why One Tenet of Dow Theory is Dead:

To-day let us focus on the Dow Industrial Average because unlike the “hot” 1980’s - today’s Dow should have a name change – to the Dow Consumer Average because unlike the 1980’s when there were 18 industrial components – now there are only 6 industrial components. The number of consumer related components has jumped from 6 in 1982 to 12 in 2014

Last September 2013, Dow Jones Indices announced that Goldman Sachs, Visa and Nike will be added to the Dow Jones Industrial Average, to replace Hewlett-Packard, Bank of America and Alcoa. The recent addition of Apple Inc – a consumer related entity is just another example of the transition to a Dow Jones buy-stuff-made-somewhere-else average

The “new” Dow has rendered one Dow Tenet – according to Charles Dow  -The Averages Must Confirm Each Other totally useless. That is because Charles Dow referred to the industrials and the rails and to-day the Dow Jones Industrials are no longer “industrial”.

Our chart displays the Dow Industrials and the SPDR Consumer Discretionary sector – monthly bars spanning about seven years – marked a plot A and plot B – which is which? Probably not what Charles Dow had in mind with his “Averages Must Confirm” theory. By the way - the “NEW” consumer weighted Dow will react badly to higher interest rates.

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