Dow Theory is one of my favorite topics. It’s fascinating how much these lessons from over 130 years ago still help in today’s times.
Think about this, we’re using Charlie Dow’s principles to analyze assets that never even existed back then. The key to remember here is that we don’t change. Humans are the constant in this equation. And that’s what we’re analyzing, at the end of the day: Human behavior.
Anyway, I encourage you to check out some of my favorite Dow Theory Tenets here. And if you really want to step up your Dow Theory game, we get heavy into it in the Charting School we built last year.
As you’ll see in those posts and Charting School, there are a lot of tenets in Dow Theory, including the fact that stocks trend, markets are a discounting mechanism, there are bull markets and bear markets, closing prices are the most important, and many more. But the one that gets the most hype is the Dow Jones Industrial Avg confirming or diverging from the Dow Jones Transportation Avg.
For me, that’s not even in the top 5 most important tenets, because it only gives you a signal once every 3-4 years, if you’re lucky. Many of the other tenets help almost every day.
Also, Charlie back in the 1880s figured (correctly) that there were the companies that made the goods (the Industrials) and those companies that delivered the goods (Railroads). As time went on, the name was changed from the Railroad Average to to the Dow Jones Transportation Avg you know today.
But even still, are Railroads, Airlines and Truckers how all of today’s goods and services are delivered? Many argue no. It’s done over the internet, or using semiconductors.
So, years ago we added the NEW Dow Theory to our Chartbooks. The answer isn’t that one method is better than the other. Like many things in our process, the answer is: We do both.
“JC, when looking at International Stock Markets, do you use their local currencies or do you price them in US Dollars?”
We do both.
“JC, do you look at Market-cap weighted indexes or Equally-weighted?
We do both.
“JC, do you analyze the futures contracts or the ETFs”
We do both.
I think you see what I’m getting at. It’s not a science. This is an Art. We use the machines to help us build stuff and we design scans for them to feed us ideas. But then the humans step in. Always.
Take a look at the NEW Dow Theory chart here below. Notice how in the past, sometimes the signal has come from Transports. Other times the signal comes from Semis. To my earlier point, this is why we look at both.
All 3 are currently making new all-time highs.
There is no signal.
Again, there are more important Dow Theory Tenets. This is a good one, for sure. I think this method is a good way to analyze today’s market using OG principles.
And it works.
This has helped us a lot over the years.
And today, it’s just telling us that stocks are in long-term uptrends.