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Home Dow Theory Tale of Two Indexes

Tale of Two Indexes

Over the past week the non-confirmation in Dow Theory between the industrials (DJIA) and the transports (DJTA) widened. Both indexes have been painting a line for over two months. Now both indexes have broken out of their lines. The problem is DJIA broke upward and DJTA broke down. This creates a non-confirmation that warns of a possible long term trend change in the near future (next several months…remember Dow Theory is about the very long term trend). Until this non-confirmation clears with the transports moving to new highs (and of course the industrials too) investors should be cautious about adding new long positions.

On the other hand, if DJIA breaks the lower boundary of its range along with the transports then it will add a larger warning that the long term trend might be changing. Any low created after a break lower from the range in both indexes will create a new secondary low that will be the trigger point of a change from a bullish trend to a bearish one.

Dow Theory non confirmation

One caveat that adds some uncertainty is that some of the recent strength in the industrials comes from short term weakness in the US dollar. Money is flowing back to multinationals and mega cap stocks due to currency prices which muddies the picture. I’d rather feel confident that money is moving to DJIA due to strength in the economy or even a flight to safety to make a clear call. You can see more evidence of relative strength from mega caps with the ratio between the S&P 500 Equal Weight Index (SPXEW) and the S&P 500 Index (SPX). It is currently falling which indicates the largest of the large are being bought more aggressively that large caps.


A couple more things to watch that put the push higher in the indexes in doubt comes from a few measures of breadth. First is the NYSE cumulative Advance / Decline line (NYAD). In healthy markets NYAD generally leads the market higher. Recently it has been leading the market lower and is currently lagging as SPX rises.


Another measure of breadth that is lagging the market comes from Trade Followers. It compares the number of bullish stocks on Twitter to the bearish stocks. Recently the number of bearish stocks has been rising which isn’t a normal occurrence near all time highs. You can see an interactive chart of Twitter breadth here. The full list of bearish stocks can be seen here.


Our market health indicators mostly fell this week as SPX moved higher. Just another thing that puts this rally in doubt. However, none of them fell enough to change our current allocations from 100% long.



Unfortunately, I’m seeing signs that the current rally and attempt at new all time highs is not being supported by a firm foundation. The Dow Theory non-confirmation, a move to mega caps, and breadth failing to confirm the current rally suggest it’s time to watch the market carefully.

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2 Comments  comments 

2 Responses

  1. Donald

    Hi Blair

    Love your work and blog…but today I’m putting on my “devils advocate” hat in the form of Joshua over at “the reformed broker”, specifically:

    “My favorite thing about Dow Theory, that new highs for the industrials should be confirmed by new highs for the transport stocks that actually ship the goods industrial companies make, is that there are three well-known newsletters focused on it and they almost never agree with each other.

    Also, never mind the fact that railroad market caps were once almost the entirety of the stock market. Or that lots of what they ship is destined for overseas (Powder River Basin coal, anyone?).

    Never mind the fact that our economy has never before been more focused on services and online activity – which doesn’t necessitate a ton of shipping activity outside of eCommerce.

    In the 1790’s, there was a boom in canal stocks – we moved goods by barge before railroads were invented and by horse-drawn cart before that.

    Is anyone still counting Procter & Gamble shipments loaded onto the Ohio River barges of Cincinnati to gauge how the economy is doing? That’s another topic for another day.”

    source: http://thereformedbroker.com/2015/05/14/the-new-new-divergence/

    What say you to that line of thought? 😉

    Cheers, Donald

  2. Blair

    I’ve been meaning to reply to Josh and also JC Parets who have been panning Dow Theory lately. I’ll try to do a full post tomorrow or over the weekend. But my main thesis is that Dow Theory still works because the DJIA always has and still does represent the major industries that underpin our economy. The transports still represent goods (and now services – people on airlines and in rental cars) being moved.

    More to come with some details.

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