One of the Few Market Forecasting Theories That Still Works
Thursday, March 16th, 2006
By Michael Lombardi, MBA for Profit Confidential
Through the years, stock market “gurus” come up with different market theories on how to forecast the direction of stock prices. As time goes by, most market forecasting theories are proven to be fallacies. There are only a handful of market theories I really believe in, the oldest and likely most important being the Dow Theory.
Under the Dow Theory, stocks will only advance to new highs if both the Dow Jones Industrial Average Index and the Dow Jones Transportation Index are moving together to new highs. The old theory holds that the big manufacturing companies in the popular Dow Jones Industrial Average are making the products and the big companies in the Dow Transportation are delivery those products to either wholesalers, distributors, or customers themselves. The products manufactured need to get to their buyer.
If we apply the Dow Theory model to today, we find it troublesome to see that while the Dow Jones Transportation Index has moved to higher and higher levels over the past couple years (recently breaking to consecutive new highs), the Dow Jones Industrial Average has failed to confirm the advance of the Transports (as they’re often called).
This blatant non-confirmation of an old theory I still believe in has been bothering me for several years now. While the Dow Transports continue to move to new record highs, the Dow Jones Industrial Average has failed to surpass its record high–a high achieved a six years ago.
A current theory on the Dow Theory (gee, what a pun) making the rounds is that the companies in the Dow Jones Transportation Index are busy delivering products made in China and that’s why stocks in the Dow Jones Transportation Index are doing so well. Who knows? Could be true.
But the bottom line for me is that until both the Dow Jones Industrial Average and the Dow Jones Transportation move in tandem to new records highs, I can’t take the recent strength in the marker seriously. In fact, with the higher interest rates we are now facing, I believe the lack of confirmation by the two popular indices could actually be flashing a cautionary sign.
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Tags: interest rates, stock market
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Michael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Today, Michael only employs the top market analysts and editors. Some of our recommendations have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Along the way to building Lombardi Publishing Corporation, now with over one million customers in 141 countries, Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland.Follow Michael and the latest from Profit Confidential on Twitter
