Dow Drops Tranny

March 11, 2004

To those of you not familiar with the Dow Theory, it’s an old fashioned indicator, so you probably shouldn’t pay much attention to it. All these old indicators, such as PE ratios, dividend yield, price-to-book – they don’t really mean anything anymore in the new economy.

But just for fun, just for a little history lesson, let me give you a brief overview of the Dow Theory. Dow theory is a description of market behavior, invented by Charles Dow, of Dow Jones fame, as a way to track the primary trend in the market. It divides the price moves of the stock market into three types of trends: primary (lasting from months to years), intermediate (weeks to months) and minor (days to weeks). It looks at only two indices as a model of the market in general, and it looks only at price action. The two indices were originally the Industrial Average, and the Railroad Average (the “Rails”). This was back at the turn of the last century – 1900 or so – when the “Industrials” numbered only 12 stocks, and the great railroads of this country were the primary means of transporting the goods produced in the industrial factories of the north to the south and out west. The theory thus takes into account the two primary factors of economic value: production and transportation.

The original theory stated that when a change in direction of either the Industrial Average or the Railroad Average is confirmed by the other, a primary change of trend in the overall market is signaled. Simultaneous movement of the DJIA and the DJTA to new highs or lows provides the theory with the signals of trend change.

Can Dow Theory be trusted today? After all, the “Industrials” are no longer really such. Now they include stocks such as Disney, Microsoft, AT&T, Citigroup, Merck and SBC, which produce very little in the way of physical goods. As for the old “Rails” index – it is now called the Transportation index, it is dominated by the airliners, which are notorious for losing money anyway. Fedex and UPS, both primary movers of goods in today’s economy are also components.

The thing about the new economy is that stock prices have no relationship to the underlying economy. This is why those old fashioned indicators mentioned above don’t work any longer. So the Dow’s dropped its tranny and issued a sell signal? Pshaw! This is an election year. The Powers That Be aren’t going to let the market fall before Dubby gets back in office.

Are they?

Forget about the economy. Do your patriotic duty, borrow some money and buy something. Don’t think so much. It’s a bull market. Pay no attention to what the statistics say, or for that matter what the market is saying. It’s a bull market. Chock full of bullsh*t!

Posted by manystrom at March 11, 2004 10:04 AM