The Dow Theory, a reliable indicator of stock market and economic direction that has been around for almost 100 years, is flashing a warning signal.

The Dow Theory looks at the relationship between the Dow Jones Industrial Average and the Dow Jones Transportation Index.

The Dow Jones Industrial Average is an index made up of the stocks of 30 large American corporations. The average includes companies like Kraft Foods Inc. (NYSE/KFT), General Electric Company (NYSE/GE), Bank of America Corporation (NYSE/BAC), and IBM Corporation (NYSE/IBM).

The Dow Jones Transportation Index is an index of the largest transportation companies in the U.S. From railroads—Norfolk Southern Corporation (NYSE/NSC)—to airlines—Delta Air Lines, Inc. (NYSE/DAL)—to trucking—C.H. Robinson Worldwide, Inc. (NASDAQ/CHRW)—to marine transportation—Overseas Shipholding Group, Inc. (NYSE/OSG).

The Dow Theory states that the rise or fall in the Dow Jones Industrial Average must be confirmed by a rise or fall in the Dow Jones Transportation Index. This makes sense, because if the economy is growing, large corporations will do well and, in turn, ship more goods and services across the U.S. and around the globe, which means that the transportation companies will directly benefit and their stock prices will rise, too. The opposite also holds true.

The Dow Theory has been a very good tool over the last 100 years for calling market tops and bottoms.

Since 2009, the Dow Jones Industrial Average and the Dow Jones Transportation Index have been following each other closely. Something happened after February 3, 2012, however. The Dow Jones Industrials continued to climb higher, reaching a four-year high of 13,000 (which I predicted), while the Dow Jones Transportation Index has fallen three percent since then.

Recently, I introduced you, dear reader, to the Baltic Dry Index, which tracks the shipping rates for bulk commodities around the world. (See: Key Economic Indicator Hits a 25-year Low.). I can tell you that the rates have continued to fall over the last month. As a matter of fact, the rates being charged shipping bulk commodities now are the same rates charged in 1986!

The Baltic Dry Index indicates clearly that there is a demand issue here…more evidence of an economic slowdown. It is no wonder that the Dow Jones Transportation Index is falling.

Since this move in opposite directions three weeks ago between the Dow Jones Industrial Average and the Dow Jones Transportation Index, it is possible that the Dow Theory is signaling a top in the markets. (However, it is important to note that this trend has only been in place for three weeks.)

I will be following the Dow Theory for my readers closely over the next couple of weeks, as we may have another confirmation of the stock market top I’ve been alluding to in my recent writings. So watch out for that stock market rally; the warnings of the rally getting close to a top are building.

Michael’s Personal Notes:

It’s looking more and more as if 2012 will disappoint and be a year of economic slowdown, not growth.

The largest economies in Asia, India and China continue to exhibit signs their economic slowdown is accelerating. For February, China’s manufacturing index showed contraction for a fourth straight month.

My warning is that if the economic slowdown continues to take hold in Asia, there is no way the U.S. will not become a casualty.

India just reported its latest numbers for industrial production for December 2011. Industrial output climbed only 1.8% year-over-year, dropping off from the 5.9% advance year-over-year in November.

The Bank of India has signaled that the economic slowdown in manufacturing and the other indicators it follows means the bank is now changing its stance from increasing interest rates to lowering interest rates.

The Bank of India now believes gross domestic product (GDP) ill rise only 6.9% (if it reaches that) in 2012 after GDP expanded 8.4% in 2011. The 6.9% GDP growth for 2012, if achieved, would be the slowest rate of growth since 2009.

Japan’s economy shrank twice what was expected in the fourth quarter of 2011; whereas GDP actually fell 0.6%. Granted, Japan still is dealing with rebuilding from the horrible tsunami disaster of last spring, but those within the Bank of Japan acknowledge that the number was worse than expected because of fewer sales to Europe—economic slowdown.

There is a consistent theme with the weaker economic numbers above. All the countries I speak of above were negatively impacted by slowing export sales to Europe, which brought the economic slowdown home to their respective countries.

As the vicious circle of the economic slowdown continues to play itself out, Europe’s economic woes will worsen, which will affect Asia—especially China—and that in turn will bring the economic slowdown home to the U.S.

It is important to note that, as we move forward in 2012, to date, the economic statistics coming from Europe and Asia continue to worsen. This means that the economic slowdown is gaining momentum to the downside.

As a result, when the economic slowdown finally hits the U.S. (and the time is not too far off), the impact will be that much greater. Be careful with that stock market rally, dear reader, the economic slowdown is coming ashore. (Also see: How the Massive Global Economic Slowdown Will Affect Us.)

Where the Market Stands; Where it’s Headed:

Wow! What a run the stock market has had his year. The Dow Jones Industrial Average has gained 813 points in the first two months of 2012; that’s a gain of 6.7% in two months.

I believe that the bear market rally that started in March of 2009 has some leg left to it. Sure, the rally is getting old and tired, but I believe it has further room to move on the upside.

What He Said:

“I see the coming recession being deep and difficult, because U.S. consumers do not have the savings to spend their way out of the recession. The same thing happened in Japan. The Japan example proved that, when consumer confidence is shattered, even zero percent interest won’t spur consumer spending. The same thing could happen here.” Michael Lombardi in PROFIT CONFIDENTIAL, August 23, 2006. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.

It’s looking more and more as if 2012 will disappoint and be a year of economic slowdown, not growth.

The largest economies in Asia, India and China continue to exhibit signs their economic slowdown is accelerating. For February, China’s manufacturing index showed contraction for a fourth straight month.

My warning is that if the economic slowdown continues to take hold in Asia, there is no way the U.S. will not become a casualty.

India just reported its latest numbers for industrial production for December 2011. Industrial output climbed only 1.8% year-over-year, dropping off from the 5.9% advance year-over-year in November.

The Bank of India has signaled that the economic slowdown in manufacturing and the other indicators it follows means the bank is now changing its stance from increasing interest rates to lowering interest rates.

The Bank of India now believes gross domestic product (GDP) ill rise only 6.9% (if it reaches that) in 2012 after GDP expanded 8.4% in 2011. The 6.9% GDP growth for 2012, if achieved, would be the slowest rate of growth since 2009.

Japan’s economy shrank twice what was expected in the fourth quarter of 2011; whereas GDP actually fell 0.6%. Granted, Japan still is dealing with rebuilding from the horrible tsunami disaster of last spring, but those within the Bank of Japan acknowledge that the number was worse than expected because of fewer sales to Europe—economic slowdown.

There is a consistent theme with the weaker economic numbers above. All the countries I speak of above were negatively impacted by slowing export sales to Europe, which brought the economic slowdown home to their respective countries.

As the vicious circle of the economic slowdown continues to play itself out, Europe’s economic woes will worsen, which will affect Asia—especially China—and that in turn will bring the economic slowdown home to the U.S.

It is important to note that, as we move forward in 2012, to date, the economic statistics coming from Europe and Asia continue to worsen. This means that the economic slowdown is gaining momentum to the downside.

As a result, when the economic slowdown finally hits the U.S. (and the time is not too far off), the impact will be that much greater. Be careful with that stock market rally, dear reader, the economic slowdown is coming ashore. (Also see: How the Massive Global Economic Slowdown Will Affect Us.)

Where the Market Stands; Where it’s Headed:

Wow! What a run the stock market has had his year. The Dow Jones Industrial Average has gained 813 points in the first two months of 2012; that’s a gain of 6.7% in two months.

I believe that the bear market rally that started in March of 2009 has some leg left to it. Sure, the rally is getting old and tired, but I believe it has further room to move on the upside.

What He Said:

“I see the coming recession being deep and difficult, because U.S. consumers do not have the savings to spend their way out of the recession. The same thing happened in Japan. The Japan example proved that, when consumer confidence is shattered, even zero percent interest won’t spur consumer spending. The same thing could happen here.” Michael Lombardi in PROFIT CONFIDENTIAL, August 23, 2006. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.

With all of the doom and gloom that we hear about on a daily basis, most of it rightfully so, there actually is one segment in the retail sector that’s doing quite well: luxury brand stocks. If we look at the overall economy, unemployment is up and jobs are scarce, for the average person. But not for the high-income, educated person with experience; their unemployment rate is mid-four percent, half the national average.

The U.S. economy is now becoming split into two parts. We shouldn’t talk about the retail sector as if it was one monolithic block. It’s essentially being chopped in two: high-end and low-end. As one can see from recent performance in the market, some of the best performing stocks are those of luxury brand stocks like Coach, Inc. (NYSE/COH), which currently sits near a 52 week high. Recent reports from Coach indicate significant improvement at the higher income potion in the retail sector.

Will the best performing stocks continue to be luxury brand stocks? That is extremely difficult to predict and much depends on whether this very lackluster economy sputters and falls back into a recession. Certainly, the additional liquidity by world central bankers has helped the higher income citizen and thus the retail sector that caters to them. Luxury brand stocks like Ralph Lauren Corporation (NYSE/RL) are still pushing near their 52 week high. Michael Kors Holdings Limited (NYSE/KORS), a hot new initial public offering in the high-end retail sector, has doubled its share price since it went public this past December.

Wyndham Worldwide Corporation (NYSE/WYN) had some interesting comments recently regarding the higher income traveler and luxury brand stocks in general. Wyndham, one of the best performing stocks over the past year, has a variety of hotels and vacation rental properties in all income sectors. The company recently stated that, in the higher-ticket segment, arrivals to its resorts are reaching an all-time high. This is reflected in its stock at a 52 week high.

Another part of the retail sector and one of the best performing stocks is Diageo plc (NYSE/DEO). Sales of liquor continued at a strong pace in its deluxe and super deluxe segments. The company sees better consumer confidence at the high-income level.

Now that we’ve looked at some of the best performing stocks in the retail sector, the question is: can luxury brand stocks continue to outperform? That is a tricky question, as much depends on more than just analyzing a business model. First off, anytime a stock is at a 52 week high and one of the best performing stocks, you need to be careful of being last to the party and buying at the high.

Luxury brand stocks in the retail sector have done well since the markets overall have done well recently. As higher-income people have investments in the markets and central banks are flooding the system with more money, this will push up asset prices, which makes someone invested “wealthier.” Also, the skills at the higher-end of the market are in short supply. If one was a computer programmer, mathematician, scientist, engineer, doctor and so on, these are areas where the U.S. is in short supply. The unemployment rate in these sectors is far below that of a laborer or a factory worker.

With the huge move we’ve seen in luxury brand stocks in the retail sector and the market overall, caution is warranted, especially with the European situation still not settled. Having said that, if we look out over the next decade, one approach would be to look to be bullish luxury brand stocks in the retail sector as long as the monetary authorities are adding money into the system. When central bankers decide to take away the “punchbowl” and reduce stimulus, then it might be time to step to the sidelines.

I recall back in 1999 when I came across a small Canadian technology company that had developed a unique smartphone with real-time e-mailing. At that time, e-mailing was still largely confined to computers, so I thought this was a novel concept that had growth written all over it. The small Canadian company was Research In Motion Limited (NASDAQ/RIMM), which was started by Jim Balsillie and Mike Lazaridis in a small city in Ontario, Canada.

I initiated coverage on Research In Motion (RIM) at around $5.00 and watched the stock surged to over $140.00 by May 2008, up 2,700%. There was nothing close to RIM’s mobile e-mail technology offered through its “BlackBerry” personal digital assistant (PDA). Corporate users around the world and especially in the U.S. began to coin the PDA the “CrackBerry” due to its addictive qualities for those who needed to stay in constant touch.

But that was then. Over the years, the advent of smartphones has steadily challenged the dominance of the BlackBerry, but the company’s position on top was not challenged until the appearance of the Apple Inc. (NASDAQ/AAPL) “iPhone.” The fateful day for RIM was June 29, 2007.

In nearly five years, the Apple iPhone has leapfrogged ahead of RIM’S BlackBerry to become the most sought-after smartphone in the world, albeit the dominant market is the U.S. In Canada—RIM’s country of origin—the BlackBerry is holding on to its market, mainly with the youths who love the “BBM” instant-messaging feature of the BlackBerry. But Apple did not get to where it is now by being lax and not being aware of any competitive threat. To try to win market share amongst the youth and against the BBM feature, Apple has its own plans to launch a more affordable iPhone that will have its own proprietary instant-messaging service.

While RIM is not yet dead money, it’s pretty close, unless under its new leader, Thorsten Gerhard Heins, the company can come up with both a defensive and offensive answer to Apple and its iPhone and “iPad” tablet. I feel it will be difficult for RIM given the amazing brand consciousness of Apple as a global icon and the must-have smartphone.

Wall Street is not optimistic about RIM as a buying opportunity. The consensus estimate call for revenues to contract 5.20% in fiscal 2012 and another 5.70% in fiscal 2013. Earnings are estimated to decline to $4.15 per diluted share in fiscal 2012 and $2.89 in fiscal 2013. Clearly, the company is contracting and, unless we see a turnaround, RIM will be dead money amid bearish investor sentiment.

The feeling on the Street is that the BlackBerry has lost its momentum to not only Apple, but also to new-generation smartphones employing the “Android” and “Windows” platforms.

The reality is that the BlackBerry no longer has that glamour that it once held. The product is seen as archaic and old. Consumers are dumping their BlackBerry and buying the iPhone and Android phones. Apple has millions waiting anxiously for new products and line-ups for days to buy. RIM draws little excitement and coverage for new products.

As I’ve said before, Apple is indeed the “best of breed.”

Institutions continue to buy Apple in spite of the stock trading at over $500.00, which I discussed in Making the Best Investments: Should You Follow the Pro Money?