Originally Published in 2006, and Updated in July 2018
The conflict between the men who make and the men who report the news is as old as time. News may be true, but it is not truth, and reporters and officials seldom see it the same way. In the old days, the reporters or couriers of bad news were often put to the gallows; now they are given the Pulitzer Prize, but the conflict goes on. James Reston 1909-1995, Dutch Born American Journalist
Is there is a better alternative to the Dow theory?
We are going to demonstrate via numerous charts that the alternative Dow theory is far better than the current Dow theory. Let’s start off by looking at some old long-term charts of the Dow Transports, utilities and Industrials to see what they are saying. Once upon a time, the old Dow theory made sense, but times have changed and the old Dow Theory no longer works. Central bankers worldwide are actively rigging the markets to create the impression that all is well; for the most part, the masses are falling for this con game.
The Dow Utilities More Important In Updated Dow Theory
The Dow theory states that primary relationship is between the Dow and the Transports, but in our view, the utilities appear an even greater role. The 1st chart is of the transports, the second of the Dow industrials and the third of the Utilities.
This chart starts from 1969 and carries on to November 1981. If we go three years back to 1966, we see that the Utilities were the first ones to put a high back in 1966 after that they just kept testing the highs (looks like a triple top). The Transports put in a new high around the middle of 1967 and then trended sideways. The industrials only put in a new high towards the end of 1969 and then started correcting.
The charts below show that all three proceeded to correct around the same time, but the three indices topped at different times. As we stated before there is a relationship between all three indices, though the utilities seem to interact with the other two best around market bottoms and not so well at market tops.
Tactical Investor Dow theory Far Superior to Original
The industrials and the transports mounted what appeared to be a hard correction and bottomed around the middle of 1970. The utilities, on the other hand, did not experience a sharp correction; even though they rallied after bottoming, they never put in new highs but traded sideways from 1971-1973 indicating that a more severe correction was in the works. Let’s just stop here for a second and now look at what the Dow and the Transports did after correcting and bottoming in the middle of 1970. Once again the transports led the way up and put in new highs almost a year before the Industrials. The transports started to correct as the Dow was in the process of setting new highs once again showing that it leads the Dow both during advances and corrections.
Tactical Investor Dow theory is a better predictor of trend changes
As we stated before the utilities, work well with the other two in predicting market bottoms. Note that unlike the Industrials (Dow) and the transports the utilities just traded sideways and it started to correct around the same time the Dow was putting in a new high. Then the correction picked up steam which resulted in both the Dow and the Utilities putting in what was a new 13 year low. Note though how the Transports put in a higher low indicating that another bullish run was in the works.
The bullish pattern is (best) illustrated by the Transports and the bearish pattern best by the utilities. Look how the transports went on to put in 3 new highs (one at the beginning of 80, one towards the end of 80 and one in 81) while the Dow and the utilities traded sideways building energy for the next leg up. We have always stated that the longer the channel formation the powerful the final move is. Look at how both the Dow and the Utilities exploded to the upside; look at the charts below that cover the period from 1976-1986.
What Every investor should know about the Alternative Dow theory
When the Dow finally broke out of the channel formation around Oct of 1983 it went ballistic; it gained close to 90% in 3 years. The utilities also rallied rather hard and also gained over 90% in the same timeframe. We are not going to look at the transports, but they continued to rally and went on to put in several new highs from 1981-1986. What we are looking for is a relationship and trigger points
So far we can conclude that the transports seem to have the best relationship with the Dow but not in the way the Dow theorists would have you believe. The Transports top way in advance of the Dow, the utilities serve as a collaborating agent; if they do not confirm the highs, it appears that a more severe correction is in the works. This was the case when the Transports put in new highs in 1972, and the Dow followed in 1973, but the utilities did not follow through. In this sense, it appears that the alternative Dow theory we have proposed is superior in nature to the original Dow Theory.
Summary of Why the Original Dow Theory no longer Works
- The number of overall players was much smaller
- Volume was much lighter. The number of shares that trade in one day now could be equivalent to one month of trading volume back in the 70’s.
- There are no longer any barriers to the US markets; outside players can access it just as easily as local players
- The age of the internet also means that the markets are now within reach of the big, medium, and tiny players. In fact, everything is just a mouse click away.
Moves that would take years to complete now only take months and those that took months only take weeks. This has another side effect, and that is that volatility has gone up by a factor of 1000. We have already demonstrated that on the shorter time frames a relationship between these three markets exists, and now we have also confirmed that there appears to be a long-term relationship in place too.
A Closer look at the Alternative Dow Theory
Let’s start off with the utilities they once again seem to serve the function of collaborating a move; in other words, if they move in the different direction to the others it means the Dow and the Transports will have to play catch up.
Note that the Utilities have been in a super uptrend for the last three years while the Dow and Transports did nothing for 12 months and 15 (plus) months respectively. The Transports were locked in a tight channel formation from Nov 05 to Nov 06 while the Dow was enclosed in the same position from Nov 05 to about Feb 06.
The utilities continued to move upwards while these two did nothing and this meant that sooner or later the Dow and the Transports would play catch up and catch up they did. Note as expected the Transports broke out earlier (Nov 06) and three months later the Dow followed. Then just like the 1972 and 73 eras as the transports and the Dow broke out the Utilities started to mount a hard correction (go back and look at the first three graphs and look how eerily similar they look).
Once again the Transports lead the Dow and put in new all-time highs first, and about four months later the Dow went on to put in a new all-time high. Note while this was going on the Utilities were moving in a tight channel and had just recently broken out. The 1st chart below is of the Dow, 2nd of the Transports and the 3rd chart is of the Dow utilities.
Alternative Dow Theory In Action
What is the Alternative Dow Theory predicting
All three markets are still trending upwards. The Utilities appear to have broken out of a channel, appear is the key word here as it could be just a false breakout. One important thing is that they did put in another all-time new high, and if they were to correct now they would flash several negative divergences. Since the Dow utilities lead the way up and or down, this means that the Dow and Transports should follow by putting in a new high after correcting.
If they follow the same pattern that means this correction is going to be hard and fast. Look at how fast the Utilities corrected after putting a new high back in Oct 2005. In less than one month they dropped from 440 to 380; a pretty significant correction. To be precise, it corrected 13.66% in that one month and then moved sideways till August where it tested its old highs and then finally broke into new ground.
Proof that it Pays to Monitor the Dow Utilities
As the transports lead the Dow, it appears that the transports have already mounted this correction. They started to correct in July a full nine months after the utilities; one could state that they began to correct in May but then proceeded to put in a double top in July. From a high of roughly 4950, they corrected all the way down to 4140 a whopping 16.36% correction.
They are now slowly moving higher but have yet to put in another new all-time high. As they lag the Utilities by several months, we think that the new high is still in the making. This means that the Dow is now ripe for a correction after having finally put in series of all time new highs. Thus if this old pattern is true and it appears that it is a rather significant pattern, then both the transports and the Dow industrials should rally to put in a new set of highs. The Dow however still needs to mount a nice decent correction before it can embark on the next leg up.
We started this thinking it would be a simple exercise, but it’s amazing how much info we can pull out of a few charts and how when you look for patterns you start to see things that most people will miss even though it’s right under their nose.
Can This Alternative Dow Theory Be trusted
The alternative Dow theory provides investors with a much better option than the original regarding identifying new trends. We hope the data provided helps you think about the possibility of an alternative Dow theory, as opposed to fixating on only the current one. If you take the time to read this article several times and look at the charts carefully, it will all start to make sense. The pattern we are describing is fairly straightforward and does not require the learning of complex cycles or waves.
June 29, 2018 Update to Alterative Dow Theory
Despite the strong pullback, the Dow industrials have experienced the Utilities are holding up very well. If we add the extremely volatile geopolitical situation into the equation (trade wars, disputes with our NATO allies, extreme polarization, etc), one would have to add that the utilities are holding up marvellously.
The utilities have not traded to new lows and until they do the alternative Dow Theory dictates that the Dow will not drop to new lows. One needs to understand that most financial experts are closer to clowns than experts and most financial sites are on par with tabloids; their sole function is to create bombastic titles with little to no subject matter to back their faulty assertions. Hence, take their sage advice with a barrel of salt and a shot of whiskey. Instead of listening to these snake oil salesman focus on Mass Psychology and study the sentiment driving the masses. It is the masses that drive the markets and if you can determine the emotion that’s driving them you can determine the trend of the market.
Taking a lot the Dow transports we see that they are also holding up well and unless they trade below 9500 on a monthly basis, the outlook will remain bullish. The trend is your friend as everything else is your foe. As the trend is positive, the stronger the deviation, the better the opportunity
To know yet to think that one does not know is best; Not to know yet to think that one knows will lead to difficulty. Lao-Tzu BC 600-?
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The first 9 charts were provided courtesy of www.prophetfinance.com