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Per Dow Theory The Economy is Solid

CAMS Weekly View from the Corner – Week ending 1/19/2018

January 22, 2018

Dow Theory made very simple:  Transport Materials – Create Products – Transport Finished Products. Excerpt Weekly View – Blue Line/Red Line Divergence May 22, 2017

There are many tools to use to help gauge the vitality of the stock market.  One such tool is to monitor how the Dow Jones Transportation Index is fairing in conjunction with the Dow Jones Industrial Average.  This is known as Dow Theory.  Dow Theory made very simple is noted in our header quote above.

The central idea here is companies transporting goods should generally be in sync trend wise with companies that are making the goods to transport.  When they diverge away from one another there is a developing disconnect that should be monitored as a concern.

These two indices together also give us a sense of the expected near-future strength of the economy overall.  Collective market participants leave a message in their wake as to their views of future expected economic activity via various market behaviors such as Dow Theory.  Per this current relationship the expectation is of solid economic growth.

INDU - 1.22.18

Click for larger view:

The above chart visually displays the trend performance of the Dow Industrials (red line) and the Dow Transports (blue line) for the past year.  As offered, the two should generally trend together.  When they diverge, such as is depicted with the red arrows, caution is noted.

Emphasis on “caution is noted” in that a simple several week divergence does not offer imminent danger as many times markets can diverge only to quickly reconnect on-trend.  This occurred in earnest in November as the Dow Transports (blue line) quickly launched upward bringing with it solid synchronicity to the Industrials.

Importantly, markets can and do get ahead of themselves with their enthusiasm and hence walk into basic downward corrections before trending higher again.  Said another way, markets do not go straight up eternally as easy as it may be to think so in light of the last several weeks of historic strength.

We watch with focus for any signs of issues in light of our historically highly valued markets.  As we stand currently, Dow Theory behavior is offering solid economic strength ahead.

I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis

Portfolio Manager, CAMS Spectrum Portfolio


H&UP’s is a quick summation of a rating system for SPX9 (abbreviation encompassing 9 Sectors of the S&P 500 with 107 sub-groups within those 9 sectors) that quickly references the percentage that is deemed healthy and higher (H&UP).  This comes from the proprietary “V-NN” ranking system that is composed of 4 ratings which are “V-H-N-or NN”.  A “V” or an “H” is a positive or constructive rank for said sector or sub-group within the sectors.

This commentary is presented only to provide perspectives on investment strategies and opportunities. The material contains opinions of the author, which are subject to markets change without notice. Statements concerning financial market trends are based on current market conditions which fluctuate. References to specific securities and issuers are for descriptive purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. There is no guarantee that any investment strategy will work under all market conditions. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. PERFORMANCE IS NOT GUARANTEED AND LOSSES CAN OCCUR WITH ANY INVESTMENT STRATEGY.

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