Summary
The Dow lost 13,000 and gave a medium-term trading signal to Short on Strength since August 15,07.
The Utilities rallied and gave a long-term investing signal to Buy since November 03.
Relative strength cycle studies suggest to be overweight the Industrials and underweight the Transports and Utilities from early 2006 until early 2008.
Dow Theory of inter-market confirmation
Charles Dow's precept was simple: if the economy is performing
well, then he expected the Industrials and Transports to do well together. As such he looked for them to be trending and making new
highs or lows together to confirm a primary Bullish or Bearish trend.
Today the situation is a lot more complex with most manufacturing being done in Asia, but the Industrials are still a significant sampling of the US economy, and with global trade the Transports are more important than ever. Since his precept was about measuring a Bullish or Bearish primary trend, I use momentum indicators on all three major Dow indices to confirm a strong Bullish or Bearish trend. Signals are generated from the daily charts for faster signals, and monthly charts for more long term investing.
When all three indices show positive PPO then we have a confirmed Buy signal, with one index negative we have a Reduce on Strength signal or Accumulate on Weakness (when coming up from a Wait in Cash signal), with two indices negative we have a Wait in Cash signal, and when all three indices are negative we have a confirmed Short on Strength signal. The system is rarely short and quick to cover to minimize risk since the markets typically go up with inflation over the long term.
Daily charts give faster signals
| Signal Date | Fast Signal | Dow Index | Index Value |
| Aug 15,07 | Short on Strength | Industrial | 12,861 |
| Jul 26,07 | Wait in Cash | Transports | 5,265 |
| Jun 06,07 | Reduce on Strength | Utilities | 504 |
| Apr 10,07 | Buy | Industrials | 12,574 |
| Feb 27,07 | Reduce on Strength | Industrials | 12,216 |
| Oct 03,06 | Buy | Transports | 4,469 |
| Aug 30,06 | Accumulate on Weakness | Industrials | 11,384 |
| Jun 05,06 | Wait in Cash | Transports | 4,608 |
| Jun 05,06 | Reduce on Strength | Industrials | 11,059 |
| Jun 01,06 | Buy | Utilities | 411 |
| Nov 03,05 | Accumulate on Weakness | Industrials | 10,523 |
| Oct 06,05 | Wait in Cash | Utilities | 409 |
| Sep 20,05 | Reduce on Strength | Industrials | 10,482 |
| Jul 26,05 | Buy | Transports | 3,741 |
| Jul 11,05 | Accumulate on Weakness | Industrials | 10,520 |
| Jun 24,05 | Wait in Cash | Industrials | 10,298 |
| Jun 08,05 | Accumulate on Weakness | Industrials | 10,477 |
| Apr 07,05 | Wait in Cash | Transports | 3,719 |
| Mar 18,05 | Reduce on Strength | Industrials | 10,530 |
| Nov 02,04 | Buy | Industrials | 10,034 |
Charts courtesy of StockCharts.com
Charts courtesy of StockCharts.com
Monthly charts give long term investing signals
| Signal Date | Slow Signal | Dow Index | Index Value | Dow Gain/Loss | Annualized |
| Nov 2003 | Buy | Utilities | 250 | ^ | |
| Aug 2003 | Accumulate on Weakness | Industrials | 9416 | 0 | |
| Jul 2003 | Wait in Cash | Transports | 2623 | 20% | 10% |
| Jul 2001 | Short on Strength | Utilities | 350 | 0 | |
| Feb 2001 | Wait in Cash | Industrials | 10495 | ||
| Nov 1999 | Reduce on Strength | Transports | 2910 | 160% | 22% |
| Sep 1995 | Buy | Utilities | 214 | ^ | |
| Feb 1995 | Accumulate on Weakness | Transports | 1596 | 0 | |
| Nov 1994 | Wait in Cash | Transports | 1443 | ||
| Jan 1994 | Reduce on Strength | Utilities | 226 | 35% | 10% |
| Jan 1991 | Buy | Transports | 1069 | ^ | |
| Nov 1990 | Accumulate on Weakness | Industrials | 2560 | 0 | |
| Sep 1990 | Wait in Cash | Industrials | 2453 | ||
| Aug 1990 | Reduce on Strength | Transports | 901 | 40% | 14% |
| Apr 1989 | Buy | Utilities | 192 | ^ | |
| Jan 1988 | Accumulate on Weakness | Transports | 764 | 0 | |
| Dec 1987 | Wait in Cash | Industrials | 2169 | -1% | -6% |
| Oct 1987 | Short on Strength | Utilities | 183 | 0 | |
| Oct 1987 | Wait in Cash | Transports | 757 | ||
| Oct 1987 | Reduce on Strength | Industrials | 1994 |
Charts courtesy of StockCharts.com
Charts courtesy of StockCharts.com
Using the Dow Theory relationship to maximize buy and hold profits
The 4 year cycle is even more apparent in the relative charts of the Dow Theory components, and we can use asset allocation to
increase our rate of return on long term retirement funds. We can use a basket of stocks or sector funds to increase our exposure
to the most favored component while decreasing our exposure to the weakest one. Until early 2008, this will mean to increase our
exposure to the Dow Industrials while reducing our exposure to the Utilities and especially the Transports.
Charts courtesy of StockCharts.com
Charts courtesy of StockCharts.com