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The Dow Theory Is Useless Today: Here's Why $DJIA

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Wall St. is full of theories attempting to explain price movement after the fact or predict price movement before it happens. The Dow Theory is one such theory, but for reasons discussed below, I believe the theory's relevance is long past, and in today's form, is utter garbage.

Generally speaking, the Dow Theory attempts to gauge the health of the economy using the movement of the Dow Industrials and the Dow Transports. More specifically it states the movement of the Industrials and the Transports must confirm each other or a trend change is likely to take place.

The Industrials make products; the Transports ship products. If the Industrials make a new high but the Transports do not, it's a sign companies are making products but not shipping them - not good. If the Transports makes a new high but the Industrials does not, it's a sign products are being shipped, but companies are cutting back on production - also not good. The theory makes sense - that the movement of one must confirm the other or else the divergence signals a reversal - but it also makes many assumptions. And it's these incorrect assumptions that render the theory nothing more than something technical analysts and newsletter writers use to sell "stuff" to the public.

Here are my reasons the Dow Theory is useless today.


1) The Dow Jones Industrial Average is not an industrial average
The first Dow Index was comprised of industrial companies that made physical products, so the movement of the average was a pretty good indicator of products being produced. But this isn't the case today because many Dow components don't make anything.


JP Morgan, Bank of America, American Express, AT&T, Verizon, Travelers, UnitedHealth Group - these companies do billions of dollars of business every year without making or shipping a single product. Even IBM is mostly a services company, and although Microsoft can put their software on CDs and ship them, this isn't how the bulk of their revenue is generated.

So, the Dow isn't an industrial average anymore because many companies make billions of dollars without relying on the transports for shipping. Right here, the link between the two indexes breaks down.
If the Dow Theory assumes industrial companies make products and the transports ship them, the entire theory breaks down when non industrial companies were added to the Dow.

2) The Dow Industrials and Dow Transports are price weighted.
The theory assumes the prices quoted at the end of every day are an accurate reflection of the stocks that comprise each index, but because of the way the indexes are calculated, an argument can be made this isn't the case.

Price-weighting means the influence a stock has on the movement of the parent index is directly proportional to the stock's price, i.e. higher-priced stocks have a greater influence on the index's movement than lower-priced stocks.

This means Chevron (CVX) has greater influence than ExxonMobil (XOM) even though XOM is almost twice as big.
General Electric (GE) is the fifth largest Dow stock but because it's the sixth cheapest, its influence is underweighted. Microsoft (MSFT) is four times bigger than Caterpillar (CAT), but since CAT is three-and-a-half times more expensive, it's much more influential.

UPS (UPS) is twice as big as FedEx (FDX), but since FDX is more expensive, it exerts a greater force on the parent index.
Even if the Dow Industrials only contained industrial companies, it can be argued that permitting the smaller stocks to "do more of the talking" results in an index that isn't a true reflection of the economy's health.

Because the indexes are price-weighted and do not consider market cap or other variables, they are calculated such that the results aren't a true reflection of "what's going on."

3) The theory does not consider volume.
Volume in the market equates to votes. The more volume, the more traders/investors are in favor of the price move. Basic technical analysis says volume must confirm a move, but the Dow Theory, as it's interpreted today, makes no mention of volume.

At the time of this writing, JP Morgan (JPM) and DuPont (DD) were trading at the approx. the same level; so generally speaking, they have the same influence on the Industrials. This means, on any given day, if DD is up 20 cents and JPM is down 20 cents, the net effect would be a wash because the movement of the two stocks would cancel each other out. But shouldn't one consider the fact that JPM trades 23 million shares/day while DD trades only 6 million?

At $45, $1.04 billion worth of JPM stock will change hands but only $270 million will change hands with DD. Equal and opposite movements of each stock should not cancel each other out. JPM should have more influence because more "money" is traded, but that's not the case.

Because the calculations of the indexes do not consider volume or the amount of dollars that change hands, the movement of the Averages is not a true assessment of the "voting" that is taking place.

4) Inefficiencies in shipping blur the purity of the theory.
The original Dow Transports were all railroads which transported massive quantities of goods. This resulted in a fairly fixed and low per-unit shipping charge. If the transports were bid up, very likely more products were being shipped. But this isn't the case today because the per-unit shipping charge has increased dramatically due to our inefficient shipping methods.

Instead of having a truckload of widgets shipped to a store (at a cost of $0.25 each), an individual widget can now be shipped directly to your mailbox for $5. This works to increase the profits for the transports, which is then reflected in higher stock prices for the transports, but isn't necessarily indicative of increased business for the producers.

And what about the resale of products? A single item may be shipped several times; a $25 book may accrue $20 in shipping charges over time. Rallying transport stocks are supposed to suggest economic growth via the shipping of products, but this isn't the case when the same item is inefficiently shipped over and over.
The inefficient manner in which products are shipped messes up the purity of the theory. A strong transports group isn't necessarily a sign of business expansion.

5) Wal-Mart ships its own products.
Wal-Mart is the largest retail store in the world, so if business is going well, it will be reflected in the Transports Average because, after all, many boats, trucks and trains are used to get their products to market, right?

Wrong!

Wal-Mart ships most of its own goods. They have more than 5,600 tractor trailers, 6,900 truck drivers and 60 distribution centers in 28 US states. But even though Wal-Mart is technically one of the world's largest shipping companies, it's not a component of the Dow Transports.

Is the Dow Transports a true reflection of the movement of products if the largest retail store in the world can ship hundreds of billions of dollars worth of goods but not have this movement reflected in the Transports Average?
The Dow Transports is not a good reflection of the movement of products because it doesn't take into consideration the movement of products flowing through Wal-Mart.

6) The theory does not take into consideration stock splits.
This is related to item #2 above. Since the indexes are price-weighed, the exact time a stock splits will greatly influence whether an index makes a new high or low. Doing a 2-for-1 or 3-for-1 stock split doesn't change anything about a company. The company is still valued the same; the dividend yield is the same; earnings per share is still the same; business has not increased or decreased. There is no material change in the company other than the stock price. But the company then has much less influence on the movement of its parent index, and if the split takes place at exactly the "wrong time," it could influence whether the parent index makes a higher high or lower low.

Stocks splits are a marketing tool companies use to tinker with their stock prices. The fact that this activity actually influences the movement of the indexes has to make you wonder if accurate readings of the indexes are possible.

7) Other
There are other reasons such as the fact that the transports often make money via fuel surcharges, so a rallying stock is not a guarantee the underlying company is shipping more products.

KEY TAKEAWAY
Wal-Mart can ship billions of dollars in products and have no influence on the movement of the Transports. Massive companies like Microsoft have much less influence than much smaller companies like DuPont. Heck, the theory breaks down right at the beginning when one realizes the Dow Industrials isn't even an industrial average, and it breaks down even further when one considers how the indexes are calculated in the first place.

Sorry, the Dow Theory doesn't work on paper for the reasons explained above, and it doesn't work in practice (beyond the scope of this write-up).

Just as many of the economic numbers released by the government were invented solely so analysts could write reports and sell "stuff" and promote "things" to the public, the Dow Theory is nothing more than something for technical analysts and newsletter writers to talk about so they can sell more "stuff" because if you actually think about it, the Dow Theory is of little use today.

[Editor's note: What do you think about this long revered theory? Is it still valid? Some say a buy signal was generated recently. Read the MarketWatch story here and let us know what you think below!]

= = =

New Markets Story:

Hedge Against the Currency War: Silver



37 Comments

Join In on this conversation, post a comment below.
JasonEyerly: This article is only true if you fail at what people do best, adaptation. Things like using the SPY versus DIA and replacing transports can prove profitable and outperform historically and we'll into the future. Try it, I dare you. Nobody expects anything to work endlessly without adapting, right? I don't buy a car expecting it to last 100 years and if I do I expect to have to replace tires, batteries, alternators, etc. Else it's not reasonable to expect it to perform as it originally did from the factory.
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Visitor - Graham: Theory is not the point. Why spend so much time attempting to shine light on yourself in a THEORETICAL way. If it works to the extent that super profits ( that is , above market expectations) then it's not garbage. Check historical returns from following the theory.
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Visitor - Market Khiladi : well you need to understand the psychology behind dow theory , things might not be working as same as after 100 yrs but psyhology does even all around the world s market ...the day you will understand you will be much better trader or investor .....
Regards Market khiladi
New delhi ( INDIA )
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Visitor - Jason Leavitt: Perhaps you can provide us with a few quotes from Charles Dow or any of his students where he mentions psychology.
JasonLeavitt: Perhaps you can provide us with a few quotes from Charles Dow or any of his students where he mentions psychology.
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Visitor - Market Khiladi : well you need to understand the psychology behind dow theory , things might not be working as same as after 100 yrs but psyhology does even all around the world s market ...the day you will understand you will be much better trader or investor .....
Regards Market khiladi
New delhi ( INDIA )
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Visitor - Britishsteel: Your points are what they are, no need to poke holes or conform . The bottom line is this market has been driven by leverage . The federal reserve policy and easy no interest money has allowed the government to prop the stock market up on present taxpayer dollars and every day creates debt slaves out of children yet unborn.This pulling foward demand has been going on since Greenspan and now with Bernake its on steriods. High Frequency Trading, Black pools and a corrupt government have rigged the markets to protect the Elites at the rest of us expense.. The market is nothing now but a casino and the house wins. To be in it is risky for more than a trade. Technical indicators are only as reliable as YOUR observations of them and how you apply them and the risk management you apply to your trade and yourself. The best bet is to starve the beast and not participate unless its just for a trade. As with CORZINE and what he did with MF global and was allowed to walk free ,your money is not safe in any brokerage. Watch your 401k's and IRA's, Roth IRA's They are salivating over how to get their hands on that money .
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Visitor - Ray : Excellent piece of writing with well founded conclusions. Very timely since I been hearing how the transports confirmed the Dow on broadcasts the last few days. You would think this was the 11th commandment the way its being proclaimed. Guess Moses did not have enough rock left to include it.
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Visitor - NewLowObserver: RE: THE DOW JONES INDUSTRIAL AVERAGE IS ONT AN INDUSTRIAL AVERAGE. For better or worse the U.S. economy has shifted from an emerging economy when Dow Theory was formulated to a service economy today. The Dow Industrials now reflects the service component of the economy as well as the industrial component. Conveniently, the author failed to list the companies that do manufacture and ship goods throughout the world. Also, these same manufacturing companies, whether producing in the U.S. or overseas, must buy raw materials that are essential in the production of these goods. Raw materials must be shipped somewhere. The author also fails to mention that JPM, BAC AXP, T, VZ, UNH, though service companies, must either ship or receive goods in order to carry out the services that they provide. They use FedEx for documents that need signatures, and order paper, pens, pencils, computers that must be shipped to them somehow.

RE: THE DOW INDUSTRIALS AND DOW TRANSPORTS ARE PRICE WEIGHTED. This argument suggests that the calculations of the Dow components is flawed towards the highest priced stocks in the index leaving the other stocks to not be reflected in the current movement. However, this argument could be easily made of the S&P 500 index which is a market capitalization weighted index. This means that the top 50 of the companies that comprise the S&P 500 account for 75% of the index movement. Furthermore, the top 100 companies in the S&P 500 account of 90% of the weighting of the S&P 500. Skewed weighing is a hallmark of all indexes currently tracked by most large institutions. This attribute won’t be solved by abandoning the Dow for some other index like the S&P 500.

If we suppose that the Dow Jones Industrial Average and Dow Jones Transportation average were in effective in reflecting the direction of the stock market and economy due to the lack of companies, then consider for a moment the fact that the S&P 500 has not fared any better in being able to exceed the all-time peak in the market. This is despite the S&P 500 being considered a more broadly diversified index.

RE: WAL-MART SHIPS ITS OWN PRODUCTS. Because Wal-Mart is not a “pure” play in shipping, why should it be part of the Transports index? The majority of their profit is derived from the high volume of low margin sales and not from the actual shipping of the goods. Once Wal-Mart starts to ship goods for other large retailers and generates a profit from such a service then the logistics division should be considered a transports component. Until that time arrives, the trucking division is in place to reduce the cost of business. We'll ignore the fact that Wal-Mart's stock price has traded in the same price range from 1999 to the present, thereby rending its stock price movement moot as an indications for the peaks and troughs that have occurred in the S&P 500 in the same period of time. If we did consider WMT from 1999 to the present, you'd think that nothing happened economically, no boom or bust since 1999.

RE: THE THEORY DOES NOT CONSIDER VOLUME:The basis of most technical and fundamental analysis in the United States can be attributed to the work of Charles H. Dow. The belief that volume is important in the markets is directly attributed to Dow and the time when the theory was formulated. It should be noted that in the WSJ articles by Dow dated October 13, 1899, March 19, 1901, April 13, 1901, May 29, 1901, December 5, 1901, January 21, 1902 there are specific references to the importance of volume. In the most definitive book on Dow Theory by Robert Rhea there is a chapter titled “The Relationship of Volume to Price Movements.”

Finally, the commentary about the various practioners of Dow Theory often get it wrong. I have extensively study the works of Richard Russell from 1958 to the present and believe that he selectively choses to use Dow Theory, to the detriment of those wishing to learn Dow Theory. Readers of Russell should note that most all of his calls that are wrong are when he ignores Dow Theory and goes by his “gut” instincts of the market. However, on November 12, 2007 in Barron’s article titled “What Dow Theory Says”, when Russell was actually applying Dow Theory, he accurately interpreted Dow Theory as indicating a bear market was coming. This was well in advance of the decline that ensued from Dec 2007 to March 2009.

Those who cite the writing of Mark Hulbert on the topic of Dow Theory should understand that Hulbert does not know Dow Theory. Therefore, he can’t distinguish when there is an error in the interpretation and cannot call the expert out on inaccurate application of Dow Theory. Hulbert simple goes to the newsletter writers with the most subscriptions that talk about Dow Theory and assumes they know or understand the topic.

What’s are take on the topic of Dow Theory, our January 15, 2013 posting is found at our website NewLowObserver dot com. In that piece, and subsequent follow-up articles, we outline the disconcerting aspect of Industrials and Transports (and NYSE) declining average volume since the March 2009 low and the absence of confirmation in the indexes.

Best Regards.
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Visitor - Gunjan Duaa, CMT: First of all a nice article.
About the Dow theory though it is too old , many things have changed since then and the use of the theory is limited but still Dow theory was among the first to give us things on the basis of which successful trading is based on.

Stay with the trend until signal proves it has ended - Now this point is the base on which any good system is based on.
Higher Highs and Higher Lows
Confirmation might be the thing which inspired Wilder to come up with Relative Strength
and Confirmation can be used by confirming different indexes for coming up with a view if not a trade.

Old but not dead :)
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SteveBurns: Excellent Article! I agree. This is what I have also believed to be true.
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Visitor - Eran Steiner: To the Dow Theory supporters below... If you really think this theory has any worth, put your money where your mouth is. What's next? you're going to tell us that buy and hold is a viable investing strategy? These are all old time theories and they are just as good as weather forecasting before computers. They will work, sometimes, but no one will trust them with their valuables. Thanks for the well written article!
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Visitor - neil naftalin: I accept the analysis and conclusions to be valid and of great value.

Thanks for the excellent work.
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Visitor - Jason Leavitt: Thanks Neil.
JasonLeavitt: Thanks Neil.
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Visitor - Bob Lang: Jason makes some great points here. The theory is older and not necessarily representative of markets today. In fact, a few of the previous dow theory buy signals were a market top.
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Visitor - Jason Leavitt: Exactly Bob. Richard Russell when long right at the 2007 top (after sitting out the entire 4+ year rally).
JasonLeavitt: Exactly Bob. Richard Russell when long right at the 2007 top (after sitting out the entire 4+ year rally).
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BlairJensen: Interesting article. But it contains some inaccuracies and bad assumptions. Just for fun I'll point out a few.

1. Dow Theory was never meant to "predict price movement before it happens". Rather is was designed to confirm the prevailing trend and warn of possible trend changes.
2. AT&T and Western Union were added to the "industrial" average in 1916 giving the average a long history with companies that "don't make anything".
3. Dow Theory relies heavily on volume. Read any book on the subject and you'll see that it is a study of both price and volume.
4. Although Walmart ships a large amount of their products, other companies rely on the transports. Enough of them to create a very large sample set that makes Walmart unnecessary in statistical analysis.

Like any study of the markets Dow Theory has its pros and cons, however, as a confirming indicator it has a pretty good history. When I see articles claiming Dow Theory dead I start to think it should work against popular sentiment as the crowd has moved onto something else...can you say DeMark Counts?
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Visitor - Jason Leavitt: Hi...I don't sub to Richard Russell, but I've read hundreds of his letters over the last 10 years. He has been dead wrong at all times. As an example, he missed the entire 2003-2007 rally, and then, right at the top when the Industrials and Transports made new highs together, he finally caved and admitted the trend was up. The market topped literally within days. Yes you can poke holes in the points I've made, but the bottom line is if you wait for the Theory to confirm a trend and give an "all clear" signal, many more times than not a reversal is right around the corner.
BlairJensen: Following a Dow Theory technician is not the same as studying the theory and putting it into practice yourself. Hamilton never once mentioned a buy signal in Dow Theory and in fact told people it would be foolish to wait until the two indexes confirmed before committing money. Instead, he recommended buying the dips (secondary reactions) during confirmed bull markets and selling rallies in confirmed bear markets.

When the two indexes were not confirming during a primary bull run he recommended looking for shorts to add to the portfolio and slowly reducing longs. During the late stages of a bear market when the two indexes we're not falling together was a time he would start reducing shorts and accumulating long positions.

So if you were following Dow Theory over the past several years you would have started reducing longs and accumulating shorts in late 2007 when the transports didn't confirm the industrials in new highs. By the crash in 2008 it should have been apparent that you should have mostly shorts in the portfolio (well before a confirmed bear market). Then in mid 2009 you would have started accumulating longs again...until the first part of 2012 where you'd start accumulating some shorts. The recent signal tells Dow Theory technicians to concentrate on long positions and buying dips until the two indexes conflict with each other. It does not signify a "buy signal" where you switch your portfolio from short to long. Instead you should have had a mixed portfolio over the past year that you now move slowly to fully long.

As a side note, I don't subscribe to Richard Russell either so I can't comment on his work. However, a good Dow Theory technician would have been long most of the rally into the 2007 highs as there were few non confirmations along the way.
Visitor - Jason Leavitt: A mixed portfolio over the last year! Really? How many people in the world are capable of being long and short at the same time for an entire year and make money? You'd have to be off-the-charts brilliant or ridiculously lucky to pull that off.

And by the way, the Industrials and Transports both made new lows at exactly the same time in March of 2009, thus confirming the downtrend, thus keeping one 100% short. Good luck with that. The Dow rallied uninterruptedly for an entire year.
JasonLeavitt: Hi...I don't sub to Richard Russell, but I've read hundreds of his letters over the last 10 years. He has been dead wrong at all times. As an example, he missed the entire 2003-2007 rally, and then, right at the top when the Industrials and Transports made new highs together, he finally caved and admitted the trend was up. The market topped literally within days. Yes you can poke holes in the points I've made, but the bottom line is if you wait for the Theory to confirm a trend and give an "all clear" signal, many more times than not a reversal is right around the corner.
JasonLeavitt: A mixed portfolio over the last year! Really? How many people in the world are capable of being long and short at the same time for an entire year and make money? You'd have to be off-the-charts brilliant or ridiculously lucky to pull that off.

And by the way, the Industrials and Transports both made new lows at exactly the same time in March of 2009, thus confirming the downtrend, thus keeping one 100% short. Good luck with that. The Dow rallied uninterruptedly for an entire year.
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KateStalter: Jason, I agree that the Dow Industrials are not industrial, and not necessarily reflective of the overall economy. However, I'm not ready to write off the Dow Transports as an indicator of greater economic health. However, you are correct that Dow Theory misses several other indicators. For example, many younger, smaller techs and retailers often show performance that mirrors current economic and social trends.
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MariaRinehart: I thought Mike's response was eloquent. While the exact relationship may have changed it is still valid to know a relationship exists. The technical analyst simply must be aware and adjust as reality changes. In late 2009, I remember Jim Cramer was bullish and siting transport. I looked at Fedex and UPS and giggled that it looked like they were actually ready to peak. The market went into correction in January 2010 and China topped by March. I thought Jim read the chart incorrectly, but he bringing up the relationship was still very relevant. So, yea many relationship s may need revisiting, but there is value knowing they exist, and value that we are aware they must be looked at with fresh eyes in the current environment.
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Visitor - Jason Leavitt: With computers today, anything is possible. I think you could relate almost any two important groups (SPX vs. the semis, SPX vs. the financials, SPX vs. copper, Nasdaq vs. NYSE, small caps vs. large caps) and come up with a reltionship which is just as telling. The difference is if I follow the small caps vs. the large caps, and I'm wrong, I know I'm wrong soon after. With the Dow Theory, you could be wrong for years before the Theory tells you so. Just ask Richard Russell. He missed the entire 2003-2007 rally and then went long right at the top.
JasonLeavitt: With computers today, anything is possible. I think you could relate almost any two important groups (SPX vs. the semis, SPX vs. the financials, SPX vs. copper, Nasdaq vs. NYSE, small caps vs. large caps) and come up with a reltionship which is just as telling. The difference is if I follow the small caps vs. the large caps, and I'm wrong, I know I'm wrong soon after. With the Dow Theory, you could be wrong for years before the Theory tells you so. Just ask Richard Russell. He missed the entire 2003-2007 rally and then went long right at the top.
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Visitor - Robert Zukowski, CMT: Definitely very interesting article with some very good points here. My take is that Dow Theory has been around a lot longer than me and will be around long after me. The reason, it has proved its worth over "many moons" and will always continue to be a widely accepted tool by market participants. I would agree that like many other disciplines, Dow Theory can give false signals from time to time, so while it "may not give a crisp signal today, tomorrow is a new day".
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Visitor - Jason Leavitt: Robert...after painfully watching Richard Russell wrongly navigate the market the last 10 years (I'm not a sub, but I've read hundreds of his letters), I think the theory will die when he dies. In order for it to last, someone has to carry the baton, and I highly doubt there's someone out who can say they've made a lot of money using the Dow Theory. Without someone with a decent track record, who will ensure the theory survives.
JasonLeavitt: Robert...after painfully watching Richard Russell wrongly navigate the market the last 10 years (I'm not a sub, but I've read hundreds of his letters), I think the theory will die when he dies. In order for it to last, someone has to carry the baton, and I highly doubt there's someone out who can say they've made a lot of money using the Dow Theory. Without someone with a decent track record, who will ensure the theory survives.
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CharlesSizemore: I would have to agree with you here. The Dow Theory is an antiquated system based on antiquated indices that few use anymore. But more importantly, you are correct in noting that the Dow Industrials are not particularly industrial today. I would also add that the globalization of transport makes the domestic index pretty close to useless. Good article,
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Visitor - Jason Leavitt: Yes Charles. I agree that globalization of everything messes things up even more. It was one of the points I left off due to length requirements. :) Thanks for your comment.
JasonLeavitt: Yes Charles. I agree that globalization of everything messes things up even more. It was one of the points I left off due to length requirements. :) Thanks for your comment.
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Visitor - Mike Carr, CMT: Your points are convincing, Jason, but I'm not sure they're relevant. Major market indexes are all highly correlated no matter how they are calculated and the DJIA has a high degree of correlation with GDP growth so it still does what it's designed to do. Note that correlation is not perfect and varies over time. But the Dow wasn't designed to be perfect.It has adapted to economic changes and does a good job representing the modern economy whether it is called industrial, post-industrial or post-historic and besides, all of the major indexes are highly correlated. The Transports were not designed to be all inclusive but were designed to be representative and they are. While revenue might increase with smaller shipments, economic theory holds utility must also rise or the revenue would not rise. Therefore, the stock prices still reflect accurately what goes on in the world because whether we ship by plane, train or automobile shipper profits are a function of economic utility.

Even though you make great points, the Dow Theory is useful because it works with 78% of the signals being winners according to a study by Colby, http://www.robertwcolby.com/dowtheory.html. Looks the last two signals were losers, which has happened twice before in the past 113 years. Until human nature and the basic laws of economics change, Dow Theory will remain relevant.

Mike
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Visitor - Jason Leavitt: Mike, thanks for your comments. My overall contention is that the movement of Industrials and Transports are no more telling than S&P vs. the semis or the S&P vs. the financials or the Nas vs. the NYSE or the small caps vs. the large caps. Ninety years ago there was a definite relationship between the two, but that relationship is much less pure today for the reasons offered. Whether the relationship has broken down for the reasons given or for other reasons probably doesn't matter. The fact is a divergence between them is no more - and probably no less - telling than many other divergences.

I don't sub to Richard Russell's letters, but I've read hundreds of them over the years, and I know he has missed major moves because he never got a signal. He literally sat on the sidelines during the entire 2003-2007 rally because he didn't get exactly what he wanted - per the Dow Theory - at the 2002/03 lows. Then, after years of missing a huge move, the Industrials and Transports made a new high together, so he finally caved and admitted the market was trending up and going long was the wise thing to be. Unfortunately, that was the top - almost to the day.

I don't know who Colby is, but stating something works 78% of the time doesn't tell me much. If it works and you make 10% and then it doesn't work and you miss a 4-year, 100% rally, I'm not interested.
JasonLeavitt: Mike, thanks for your comments. My overall contention is that the movement of Industrials and Transports are no more telling than S&P vs. the semis or the S&P vs. the financials or the Nas vs. the NYSE or the small caps vs. the large caps. Ninety years ago there was a definite relationship between the two, but that relationship is much less pure today for the reasons offered. Whether the relationship has broken down for the reasons given or for other reasons probably doesn't matter. The fact is a divergence between them is no more - and probably no less - telling than many other divergences.

I don't sub to Richard Russell's letters, but I've read hundreds of them over the years, and I know he has missed major moves because he never got a signal. He literally sat on the sidelines during the entire 2003-2007 rally because he didn't get exactly what he wanted - per the Dow Theory - at the 2002/03 lows. Then, after years of missing a huge move, the Industrials and Transports made a new high together, so he finally caved and admitted the market was trending up and going long was the wise thing to be. Unfortunately, that was the top - almost to the day.

I don't know who Colby is, but stating something works 78% of the time doesn't tell me much. If it works and you make 10% and then it doesn't work and you miss a 4-year, 100% rally, I'm not interested.
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About the Author

Jason Leavitt is the founder of LeavittBrothers.com, an advisory service for self-directed traders, and PLcharts.com, a web-based tool that enables option traders to draw profit/loss diagrams. He started trading in 1999 and went full time in 2002.

He's traded stocks, options and futures in several bull and bear markets and primarily uses technical analysis to analyze the market. 

Originally from Chicago, Leavitt has also lived in Austin, TX, New York, Boston and Denver and now lives in Costa Rica. 

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