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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Is the Dow Jones Index and Dow Theory Irrelevant? 

Stock-Markets / Dow Theory Aug 23, 2008 - 10:54 AM GMT

By: Tim_Wood

Stock-Markets Best Financial Markets Analysis ArticleThis past week I was listening to an interview with an analyst who said that she had some 27 years of experience. In this interview she claimed that the Dow Jones Industrial Average was irrelevant. When I heard this I cringed. Now this is not to say that I don't see the argument behind this statement. Most people that make such statements are merely referring to the fact that the Dow Jones Industrial Average is comprised of only 30 stocks and that because of its narrow cross section of the market it is not reflective of the entire market. I have heard this argument countless times and hearing it once more really didn't surprise me.


However, the Dow Theory itself has proven that such statements are in fact erroneous. Fact is, the Dow Jones Industrial Average and the Dow Theory are without a doubt as relevant today as they were back in the day of the Dow theory founding fathers, which were Charles H. Dow and his successors William Peter Hamilton and Robert Rhea.

Mr. Dow never actually published a book, but as editor of the Wall Street Journal, he published his commentary and discussed his methods in the Wall Street Journal. Mr. Dow's commentary was widely followed and respected. After Dow's death in 1902 William Peter Hamilton began writing articles for the Wall Street Journal utilizing Dow's methods. As an example, on October 25, 1929 Hamilton wrote his famous article titled “A Turn In The Tide” in which Hamilton warned of the confirmed bearish trend change in accordance with Dow's methods. As with today, few listened to the warnings and we all know the rest of the story.

Mr. Hamilton died in December 1929 and it was then Robert Rhea who picked up the Dow theory torch. Mr. Rhea then provided market analysis using Dow's methods and in his newsletter. It was in Rhea's November 22, 1932 newsletter that he said he believed that the bear market had ended on July 8, 1932. It was then in Rhea's May 27, 1933 newsletter that he reported a bullish confirmation had occurred.

Moving forward in time, it was in Richard Russell's February 5, 1974 newsletter that he reported on the January 27, 1975 bullish confirmation and that a primary bull market had begun. It was then on September 21, 1999 that Richard Russell used Dow theory to signal the trouble we saw between 2000 and 2002. From the 2000 peak the DJIA fell some 38%. The S&P 500 fell 51% and the Nasdaq fell by just over 83%.

It was then on June 4, 2003 that the Industrials confirmed the Transport's move above their previous secondary high points. In doing so, this confirmed that under a classical or orthodox interpretation of Dow theory the primary trend had turned up. Under this strict interpretation of Dow theory, the averages remained “in gear” to the upside until the Dow theory non-confirmation occurred in late 2007. In the wake of that non-confirmation and in accordance with classical Dow theory, a bearish primary trend change was in fact confirmed on November 21, 2007. I personally warned about the significance of the late 2007 non-confirmation as well as the primary bearish confirmation when it occurred. From the October high down into the recent July low the DJIA declined some 22%. The current Dow theory chart can be found below.

In the wake of the 2007 Dow theory developments the S&P 500 fell by some 24% as did the Nasdaq 100. But, these Dow theory developments also coincided with the top in the Shanghai index, which has fallen by 62% into its recent lows. I also want to point out that the Hang Seng topped in October 2007 as well and is now off of its high by some 35%.

So, to say that the Dow Jones Industrial Average or that the Dow theory is irrelevant is obviously unfounded, to say the least. At present, the orthodox primary bearish trend change that occurred on November 21, 2007 still remains intact. In the wake of that confirmed bearish trend change we do have a downside non-confirmation that is still in place and is noted in green on the chart above. This non-confirmation serves as a warning that the trend MAY be trying to reverse. But, until the Dow theory actually provides us with confirmation of a primary trend change, it is important to understand that the orthodox primary bearish trend change from November 21, 2007 is still considered to be intact. Don't fall for the line that the DJIA or the Dow theory is some antiquated relic of the past that no longer has its place.

Do you recall any of the experts in the mainstream explaining the meaning of the October/November decline in 2007? Did Cramer explain the meaning of the Dow theory non-confirmation or the confirmation of the primary trend change? I specifically remember reading articles in the October to November timeframe by analyst claiming that the Dow theory was wrong. The Dow theory was right and those who were reading my service knew first hand what was occurring and what to expect next. Again, don't fall for the hype that the Averages or the methods first developed by Charles H. Dow over 112 years ago are irrelevant. You have been warned!

I have begun doing free Friday market commentary that is available at www.cyclesman.com/Articles.htm so please begin joining me there. Should you be interested in more in depth analysis that provides intermediate-term turn points utilizing the Cycle Turn Indicator, which has done a fabulous job, on stock market, the dollar, bonds, gold, silver, oil, gasoline, and more, those details are available in the newsletter and short-term updates. I will also be covering the details on the dollar and commodities in the coming months as these developments unfold. A subscription includes access to the monthly issues of Cycles News & Views covering the Dow theory, and very detailed statistical based analysis plus updates 3 times a week.

By Tim Wood
Cyclesman.com

© 2008 Cycles News & Views; All Rights Reserved
Tim Wood specialises in Dow Theory and Cycles Analysis - Should you be interested in analysis that provides intermediate-term turn points utilizing the Cycle Turn Indicator as well as coverage on the Dow theory, other price quantification methods and all the statistical data surrounding the 4-year cycle, then please visit www.cyclesman.com for more details. A subscription includes access to the monthly issues of Cycles News & Views covering the stock market, the dollar, bonds and gold. I also cover other areas of interest at important turn points such as gasoline, oil, silver, the XAU and recently I have even covered corn. I also provide updates 3 times a week plus additional weekend updates on the Cycle Turn Indicator on most all areas of concern. I also give specific expectations for turn points of the short, intermediate and longer-term cycles based on historical quantification.

Tim Wood Archive

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