At the request of several readers, today we'd like to dive into one of the very
oldest stock forecasting models - the Dow theory. The theory itself is multi-faceted,
but for now we're just going to look one piece of the puzzle, which is the leading or
lagging effect the Dow Transportation Average has on the Dow Industrials (and vice
versa).
First though, let's discuss the basic theory. The idea came to life in the early
1900's when industrial production and railroads were the two staples of American
economic growth. Although seemingly different, they were both important pieces to one
puzzle. After all, if goods were being produced in factories, they also had to be
shipped. This was a win-win situation for production and rail transport. If demand
for goods dropped, then factories slowed production. And if factories produced less,
then the rail carriers suffered from a lack of demand for their services. That was a
lose-lose scenario.
The theory, then, is that the two indexes should behave in tandem. Typically one
leads the other, but the lagger shouldn't be far behind. It is widely accepted that
the transportations are more apt to lead, since factories and capital goods producers
make shipping arrangements well in advance (sometimes even before they actually have
made the good they're going to ship). Assuming a stable business cycle, they should
even both make news highs and new lows in almost perfect synchronization (again, the
theory says that one typically leads the other slightly). As long as this is
happening, forecasting the general direction of stocks is fairly transparent
The real value of the theory, though, is spotting points when the two indices are not
moving in tandem. Rather, if the transportations and the industrials are diverging,
one or the other is due for a correction. After all, if factory production is
slowing, that would ultimately hurt transports. And if transportation stocks are
suffering, the industrial companies may have a tough time being able to afford rising
shipping costs.
The theory is sound, albeit a little slow. As usual, it's best illustrated with an
example. The graph below is self-explanatory and the important areas of the chart are
noted. The two blue horizontal lines are the next likely resistance levels for the
Dow Industrials and the Dow Transportations. If stocks are truly healthy, you should
be seeing both of those levels eventually broken.
Dow Industrials vs. Dow Transports - Decline between 2000 and 2003
You can see how the two should move in unison, and the kinds of problems that occur
when they don't. And I'm sure that many of you are already thinking to yourself that
this theory is a century old, and it doesn't account for the new internet and
technology era. True, but 3M still makes post-its, GM still makes cars, and Wal-Mart
still sells everything - and all those companies still ship goods. Since then, the
transportation average has also added trucking and air freight components. In other
words, the premise is still relevant.
This is just one aspect of the Dow theory, but an important one. Keep an eye on both
of these indexes, and you may get a hint as to where stocks are headed.
Se não receio o erro é porque estou sempre pronto a corrigi-lo
There's no bull side and no bear side. JUST THE RIGHT SIDE!
#forex4u - chat forex MIRC
O Clubeinvest.com informa que nenhuma da informação
aqui facultada deverá ser entendida como conselho ou recomendação
de qualquer tipo de transacção ou investimento.
