Dow Theory

[winston]

New Dow Theory "buy" signal could be a sucker's bet By Brandon Herrin:

One of the most time-honored stock market analysis methods is Dow Theory.

Put simply, this method tracks the Dow Industrials and the Dow Transports. These two indexes represent the production of goods (Industrials) and the shipment of goods (Transports). When the two indexes move to new levels together, Dow Theory sets off its "buy" and "sell" signals.

Dow Theory just set off a "buy" signal. But as this article details, the extraordinary volatility we've seen in the market makes this signal very late to the party.

http://online.barrons.com/article/SB124 ... BOL_hpp_dc

[winston]

THE TRANSPORTERS OF GOODS ARE SURGING RIGHT NOW

Study the market for a few months, and you're bound to come across the idea of "Dow Theory."

Charles Dow is the legendary founder of both the Wall Street Journal and the Dow Industrials Average. There are several ideas contained in his Dow Theory system of market analysis, but one of the main points is to monitor both industrial shares (the manufacturers of goods) and transportation shares (the transporters of goods).

This gives the investor a "big picture" view of the economy and stock market. Dow said if both manufacturers and transporters were enjoying higher stock prices, they were "confirming" a bull trend.

You probably know the Dow Industrials is near a yearly high. Today's chart displays the other side of the equation, the Dow Transportation Average. This index tracks America's largest railroad, trucking, and freight companies. It just broke out to a new yearly high.

Some of the smartest investors in the world are calling for stocks to head lower... and at least in the very short term, the market is extended to the upside. But looking at things from a wide perspective, we can see the Fed's gigantic E-Z-Credit program has goosed the economy into high gear... and the trend is UP.

Source: Daily Wealth

[winston]

Transports Explode
Wednesday, April 14, 2010 at 02:59PM

As shown below, the Dow Jones Trasportation Average is on fire. Since February 8th, the Transports index is up 22%. Investors looking for rally confirmations keep a close eye on the transports, and for now, it is signalling full steam ahead.

As noted in our last post, however, one has to wonder when investors will decide to take at least a small breather.

http://www.bespokeinvest.com/thinkbig/2 ... plode.html

[iam802]

Time to visit the Dow Theory again.

Note:
I am summarizing it from the Technical Analysis book by Edwards and Magee.

-----------------
3 Phases The Bear Market

1. Distribution Phase
- Starts from the later stage of the preceding Bull Market
- Farsighted investors sense the fact that business earnings have reached an abnormal height and unload their holdings at an increasing pace.

2. Panic Phase
- Buyers begin to thin out
- Sellers become more urgent
- Downard trend of prices suddenly accelerates into an almost vertical drop
- Volume mounts to climactic proportions
- There may be sideway movements after this and then.... the third phase begins

3. Final and 'dump them' phase
- More discouraged selling on those who have hold their 'gems' till the last or have bought it in the Panic Phase because it is cheap
- Business news now begins to deterriorate
- Downward movement is less rapid
- Better-grade stocks decline more gradually
- And it will be over before the last of the bear news is out

What do you think? Do you agree that we are now in Phase 2?

I have attached SPX chart to highlight the phases that I think we are in

[kennynah]

What do you think? Do you agree that we are now in Phase 2?

I borrow a phrase from a friend..whenever, he is asked a difficult question, he first answers "it depends"... Hahaha

it depends on one's perspective of whether the US market has over-priced it's equities ahead of anticipated recovery

and

one's perspective of whether this European crisis is unmanageable.

Write more after the sun wakes up:)

[kennynah]

it depends on one's perspective of whether the US market has over-priced it's equities ahead of anticipated recovery

i think, the US economy has been recovering since start of 2009...but what is the definition of "recovery"? should it be :

a) unemployment rate?
b) corporate earnings?
c) trade account balance?

i think probably a combination of all of the above. however, i place more specific emphasis on "corporate earnings".... a trending healthy corp earnings represent the firms' ability to hire, consume and produce, all of which oils the engine of economic growth.

i agree that the official 9.7% unemployment rate is historically high figure...we have to go really far back to see this number repeated...even during the post dot.com days, unemployment was not above 7% at its worst.
however, has unemployment really dented the economic growth? or was this increasing number of unemployed, really trimming off the fats from the corporations?

i think, it is the case of letting deadwoods go that helped companies become more efficient and therefore became more productive that led to some improvement in their overall profit margins.

but that's not to be confused with revenue generation. if unemployment had a very significant effect on the revenue earnings of companies, then we should not have seen a continuous rise of corporate earnings and profits across almost all major institutions in the last 18 months...

what then is causing this uncertainty that these major corporations cannot continue on its path of earnings growth?

since nothing significant on the downside has occurred in the US continent over the last 18 months, this current jitters has got to be from the perceived threat from European continent.

so...now we must think and analyze how much of a negative impact the EZ will have on USA....

(too tiring writing this post ...now, your turn )

[winston]

if unemployment had a very significant effect on the revenue earnings of companies, then we should not have seen a continuous rise of corporate earnings and profits across almost all major institutions in the last 18 months...

Some "gurus" have said that the increase in corporate earnings in the past 18 months, is due to the replenishment of very low inventories. ( Those inventories were drawn down due to the anticipation of a slowdown in 2008 and were already very thin due to "on-time" delivery nowadays ).

It would be interesting to see what will happened in the next 18 months because inventories are now at "normal" level and China is not stimulating their economy as much as in 2009. In addition, there's also the supposedly European Contagion to look out for ..

[kennynah]

what's Dow's theory anyways?

[iam802]

Not enough bearish view yet. K said it will go up (with his revised target in another thread).

So, I need to see the market go further down.

Some thoughts:
- weak job figures in US
- Europe's economic woes (we need to see one of the bigger ones goes down eg Germany, France, UK etc)
- strategic mortgage defaulters; people are not paying and spending money on consumables ... buy their iPads out of the recessions. Does this make sense?


Having said that, it may end before all the bad news are out.

[kennynah]

Like all events in the historical makings of key indexes, they require judgment calls... Those who make the right ones at important junctures reap the economic and life changing benefits... Separating the wealthy from the not so wealthy

so, good luck to us all

may the force be with you.. live long n prosper