Dow Theory Buy Signal On Dow Transports New High?
I guess I should respond to recent events as it pertains to Dow Theory. Don't expect the same cheers you are reading on the front page of market publications or shared by TV personalities. I really haven't spent alot of time writing about Dow Theory confirmations or nonconfirmations over the last few years because as far as I would define Dow Theory, we haven't received any Dow Theory sell signals since this bull market began. Yes, there were times when the Transports moved higher and the Industrials didn't or vice versa, but those were short lived movements of minor moves. The drop in the Transports in 2006 was the first meaningful decline in the Transports since this cycle began. Because of the size of the drop in the trucking and railroad sectors, it was and remains a concern. Yet, I'm not sure a Dow Theorist (I am not one myself) would have ever made the call that they received a sell signal in this cycle.
Let's back up for a minute. For those of you who don't know, Dow Theory is basically a set of writings hypothesizing market movements by Charles Dow, the father of all things Dow and the founder of the venerable Wall Street Journal. Part of Dow's writings hypothesized rail stocks must confirm the move in industrial stocks to validate a healthy equity market and underlying economy. It's common sense that if Industrials are moving higher that the companies shipping their product are also making moves higher. If one isn't following the other, and it usually is that Transports aren't rising with the Industrials, the economy may be weakening and the market move could be a false one. Now, I've given you one cliff note and there are alot of people who have taken those writings and developed them much further than anything I am writing about. But, when most people write of Dow Theory, they are talking about Industrials and Transports confirming one another in pricing action. The foremost authority on Dow Theory today is Richard Russell. Russell is a man I admire greatly for his deep thought, honesty, understanding of markets, Wall Street's workings and because he's been around the block a few times. Nearly 80 to be exact.
Most of the general talk this past week re the Transports and Dow Theory has been made by the bulls. This is after the bears were pointing out the Transports didn't confirm the Dow's new highs this past rally. Well, from my perspective there's really not alot to write about on either side. Neither the Transports nor the Industrials have really done alot other than bide time and neither has made a lower low on the charts thus confirming bearishness. Yet. What I do find worthy of writing about is the generally false comments.
I'm not going to single out any particular blogger, journalist or market prognosticator. But, I will say that in the world of free speech in which we live, if you are going to put it out there, you had better be prepared for criticism. In the world of business, you learn to press your advantage. Here's one situation where I see that advantage. Or, frankly, an opportunity to discredit the oft fact-less hype machine we sometimes call "news". My criticism is with the statement that whenever the Transports and Industrials are making new highs, it means a Dow Theory buy signal must be generated. That it is purely mechanical and if one doesn't follow it, they aren't following Dow Theory. Or, that the Industrials and Transports making new highs bodes well for future stock market gains. There are many out there making these very statements right now.
I am quite confident if Charles Dow or any of the people who developed his writings into Dow Theory were alive today, they would not be calling a new bull market or allocating significant new dollars to the world equity markets just because the Transports hit a new high. First of all, I don't believe Charles Dow ever hypothesized anything about Transports. He hypothesized about rail stocks confirming industrial stocks because rails shipped the goods of the industrial economy. That doesn't include airlines making new highs because of a drop in oil as has happened with the Transports recently. Additionally, if Dow Theory stated that every time the Transports and Dow hit a new high, one should go long the stock market, it would be an absolutely awful market timing mechanism. I really don't think any Dow Theorist would make such statements as is being made by so many news sources today.
Dow Theory is a little like religion. One can find any message in religion to support biases. So too with Dow Theory. The next time someone tells you the Transports are confirming the Industrials implying a strong market is dead ahead, you can tell them they need to do a little more homework. Dow Theory is a framework of anecdotal evidence to be used prudently. If one is using the action of the Transports as a sign of future market action, one could just as easily hypothesize a top is near from a historical perspective. In other words, don't expect to give a monkey a calculator and have him solve the world's problems.
Let's look at two examples to validate this point. Up until this past week, the last time we actually had both the Transports and Dow making all time highs was mid year 1999. The bull market was basically over by June of 1999. The market had deteriorated significantly and the only stocks driving higher were some internet and large cap tech stocks blowing off into early 2000. So, to issue a buy at that time would have been followed by a drop of nearly 85% in the Nasdaq and large drops in other sectors as well. That includes a big drop in the Transports. Similarly, in 1929 the Dow Transports and Dow Industrials confirmed new bull market highs the exact month we had a top in the stock market before the Great Depression. If one would have issued a buy at that time or would have said the future of equity investments was likely to be bullish, they were again incredibly wrong. They would have again bought at the very peak of a bubble market only to see their investments drop 90%.
Dow Theory buy signal? If it was that easy, we'd all be rich. Once again, the media's reporting is inaccurate. Be forewarned. The Transports are within a handful of percentage points of reaching an overbought condition only seen two other times in the last eighty years. When were those times? Well, I'll let you figure that one out. But, both dates were mentioned in this post.
Let's back up for a minute. For those of you who don't know, Dow Theory is basically a set of writings hypothesizing market movements by Charles Dow, the father of all things Dow and the founder of the venerable Wall Street Journal. Part of Dow's writings hypothesized rail stocks must confirm the move in industrial stocks to validate a healthy equity market and underlying economy. It's common sense that if Industrials are moving higher that the companies shipping their product are also making moves higher. If one isn't following the other, and it usually is that Transports aren't rising with the Industrials, the economy may be weakening and the market move could be a false one. Now, I've given you one cliff note and there are alot of people who have taken those writings and developed them much further than anything I am writing about. But, when most people write of Dow Theory, they are talking about Industrials and Transports confirming one another in pricing action. The foremost authority on Dow Theory today is Richard Russell. Russell is a man I admire greatly for his deep thought, honesty, understanding of markets, Wall Street's workings and because he's been around the block a few times. Nearly 80 to be exact.
Most of the general talk this past week re the Transports and Dow Theory has been made by the bulls. This is after the bears were pointing out the Transports didn't confirm the Dow's new highs this past rally. Well, from my perspective there's really not alot to write about on either side. Neither the Transports nor the Industrials have really done alot other than bide time and neither has made a lower low on the charts thus confirming bearishness. Yet. What I do find worthy of writing about is the generally false comments.
I'm not going to single out any particular blogger, journalist or market prognosticator. But, I will say that in the world of free speech in which we live, if you are going to put it out there, you had better be prepared for criticism. In the world of business, you learn to press your advantage. Here's one situation where I see that advantage. Or, frankly, an opportunity to discredit the oft fact-less hype machine we sometimes call "news". My criticism is with the statement that whenever the Transports and Industrials are making new highs, it means a Dow Theory buy signal must be generated. That it is purely mechanical and if one doesn't follow it, they aren't following Dow Theory. Or, that the Industrials and Transports making new highs bodes well for future stock market gains. There are many out there making these very statements right now.
I am quite confident if Charles Dow or any of the people who developed his writings into Dow Theory were alive today, they would not be calling a new bull market or allocating significant new dollars to the world equity markets just because the Transports hit a new high. First of all, I don't believe Charles Dow ever hypothesized anything about Transports. He hypothesized about rail stocks confirming industrial stocks because rails shipped the goods of the industrial economy. That doesn't include airlines making new highs because of a drop in oil as has happened with the Transports recently. Additionally, if Dow Theory stated that every time the Transports and Dow hit a new high, one should go long the stock market, it would be an absolutely awful market timing mechanism. I really don't think any Dow Theorist would make such statements as is being made by so many news sources today.
Dow Theory is a little like religion. One can find any message in religion to support biases. So too with Dow Theory. The next time someone tells you the Transports are confirming the Industrials implying a strong market is dead ahead, you can tell them they need to do a little more homework. Dow Theory is a framework of anecdotal evidence to be used prudently. If one is using the action of the Transports as a sign of future market action, one could just as easily hypothesize a top is near from a historical perspective. In other words, don't expect to give a monkey a calculator and have him solve the world's problems.
Let's look at two examples to validate this point. Up until this past week, the last time we actually had both the Transports and Dow making all time highs was mid year 1999. The bull market was basically over by June of 1999. The market had deteriorated significantly and the only stocks driving higher were some internet and large cap tech stocks blowing off into early 2000. So, to issue a buy at that time would have been followed by a drop of nearly 85% in the Nasdaq and large drops in other sectors as well. That includes a big drop in the Transports. Similarly, in 1929 the Dow Transports and Dow Industrials confirmed new bull market highs the exact month we had a top in the stock market before the Great Depression. If one would have issued a buy at that time or would have said the future of equity investments was likely to be bullish, they were again incredibly wrong. They would have again bought at the very peak of a bubble market only to see their investments drop 90%.
Dow Theory buy signal? If it was that easy, we'd all be rich. Once again, the media's reporting is inaccurate. Be forewarned. The Transports are within a handful of percentage points of reaching an overbought condition only seen two other times in the last eighty years. When were those times? Well, I'll let you figure that one out. But, both dates were mentioned in this post.
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