Monday, July 18, 2011

Dow Theory

Today's column covered the transports' failure to hold on to a breakout to all-time highs. In Dow Theory, the idea is that companies that make the goods (industrials) and companies that move the goods to market (transports) should confirm each other. If both move to new highs then the market should be cooking on all burners.

If companies are selling lots of stuff and need to move them to market, that's good. The economy should be hot. We all know its not. The potential Dow Theory buy signal was doomed from the start so it really was a good thing it never fired. At a minimum, it saved a lot of market letter writers from egg facials.

I have contended for a long time that the two Dow averages - industrials and transports - are not what their namesakes tell us they are. McDonalds and Microsoft are industrials? Disney? Travelers? You get the point.

And even if you argue that the makeup of the Dow reflects the economy  then I will counter that Kansas City Southern does not move any products those stocks sell. Cisco is more of a transportation stock to me as it provides infrastructure to move data. So is Verizon. And Facebook.

The message is that the more things change, the more things change. Nothing stays the same and we all need to adapt. Sorry Chuck (H. Dow), that part of the theory is now fuzzy at best.


Normand said...

Excellent observation.

Food for thought.


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