Does Dow Theory Still Matter?

I think so, because it's telling us something about the market. In the first charts I want to show you the Dow -20, better known as the transports. In red is the comparison symbol for the Dow-Jones 30 index.

 Here we see relatively good confirmation between the two averages.


 Take a closer look though and you'll note the Dow 20 has broken down recently as the Dow -30 makes new highs. This is part of Dow Theory, the averages should confirm each other in their trends, Primary, Intermediate, and short term and some have added sub-intermediate. I'd say the DJ-20 has reached a short term and perhaps sub-intermediate down trend while the Dow-30 makes new highs. In traditional Dow theory, this is always a caution flag. Think about it and this is the reason that I have added select transports to the trade list; The Dow, S&P, NASDAQ, etc are all signs of the economy, that is why the stock market is considered a leading indicator. Manipulation aside, when the companies that are components of these averages rise, economic activity is thought to be on the mend or doing well, however, those goods must be shipped and if the index representing the companies that ship those goods is diverging, something is amiss.

Here, right at the breakdown in 2008, we see an inverse version where the Dow failed to confirm, but shipping companies where testing and making marginal new highs. shortly after that we saw the huge chaotic plunge into the start of 2009.

I've showed you the Baltic Dry Index (cost of shipping prices for dry goods) many times recently. Some would maintain that a new fleet of dry ships has caused the drop in shipping rates, there are a few realities to that argument, but there are a few holes in it as well. The bottom line is now we see the DJ-20 (transports) acting badly as well. Again this is the reason I've added several companies that fall in the transports industry to our trade list.

As for the averages themselves, today we have marginal highs on the Q's and IWM, but there's little doubt from a Dow theory perspective they are lagging the S&P and Dow.

This is not an alarm bell, it's a call to vigilance and to remember that bubbles creep up on you, usually when you least expect them.