Dow Transports Say: The Bull Market Lives!
Matt McAbby
Quantitative Analyst, Oxbury Research
Dow Theory, developed originally by Charles Dow, the founder and editor of The Wall Street Journal, is one of the oldest and most reliable methods of market analysis available to investors. Without getting into all the particulars, one of the key tenets of Dow Theory is that both the Dow Transport Average and the Dow Industrial Average must confirm one another when bull and bear markets begin. Below we examine exactly how this works.
But first, let’s take a brief look at the relationship that binds the Transports to the Industrials.
There are two aspects to traditional industrial sales: production and distribution. When sales are good, production levels are high and the product in question is moved in quantity. Dow Theory posits that this reality manifests itself in elevated prices in both the averages. Transport companies profit handsomely for moving goods to market along with the manufacturers themselves.
Conversely, when economic contractions occur, less product is shipped and production slows. This, too, manifests itself in downturns for both the Transports and Industrials.
More importantly, market turns, changes from bull to bear or vice-versa, occur when divergences occur in the averages. Or to use Dow terminology, where “non-confirmations” occur.
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