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Portfolio Update

Dow Theory Suggests Weakness Ahead

By Elliott H. Gue, on Aug. 23, 2017

The S&P 500 sits less than 2 percent below its all-time intra-day high set on August 8. And it hasn’t closed below the 200-day moving average in more than a year.

Yet while the broader market looks strong on the surface, underlying trends have weakened considerably over the past six months.

The Dow Theory is named for Charles Dow, the creator of the Dow Jones Industrial Index and founder of the Wall Street Journal. According to the theory, when the Dow Jones Industrial Index makes new highs, the Dow Jones Rail Average (now the Transportation Index) should confirm the bull market by breaking to new highs as well.

The fundamental idea is that when the US economy is strong, companies that manufacture goods and equipment (stocks of which comprise the Industrial Average) should perform well and experience rising sales, earnings and stock prices. Similarly, if manufacturers are making more goods, the rails should benefit from increased volumes and demand for transport.

When these two key indexes don’t move in tandem, the uptrend is suspect.

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