The Dow Theory | Divergence Between the Dow Industrials and the Dow Transportation Index

There is a powerful market timing indicator you can use to find warning signals of a potential market top or an imminent stock market correction.

This indicator is called the Dow Theory.

Here’s a quick video where I explain this theory:

Let me explain by a recent example.

Stock markets have been hitting record highs.

And the “DUMB” money is getting more bullish (according to COT reports).

But there is one chart that does NOT agree with any of this, and is giving us a fresh warning.

Take a look at this chart of the Dow Industrials (Dow Jones 30):

Dow Industrials

The Dow has been in a strong uptrend.  Since October it has risen by 5%.

Now take a look at the Dow Transports (the Transportation index):

Dow Transports

The Dow Transportation has been falling since October.  It is down 5%.

Now you may be thinking so what?  Does it matter?

The answer is YES – according to one of the best and most reliable measurements of the market’s health, called the Dow Theory.

​​​​​​​According to the Dow theory, when the Transportation stocks are falling whilst the Industrials are rising – something is wrong.

This is because there are TWO things needed for a healthy economy:

1) Companies that MAKE stuff (the industrials)… and

2) Companies that TAKE stuff (the transports).

You cannot have a healthy economy if the stuff that gets made and manufactured is not being shipped around.  This shows a possible slowdown in demand – a major warning signal.

For example, a few months ago, Mark Hulbert of Marketwatch wrote about how the Dow Theory is telling us to chill about the health of the bull market.

However, it is unwise to get too bearish on the stock markets.

Whilst I do expect that we shall see a 3 to 5% correction in stocks and the Dow – either this month or next – I still expect a continuation rally higher by end of December.

So one of two things can happen here:

1) Either the Dow industrials will fall and we shall see a correction (i.e. the warning signal from transports is correct) – or

2) The Dow transports will rise to catch up with the industrials (meaning that the warning signal came too early).

Personally I prefer the first option.  I think the warning from the Transports is real.  And a correction by the end of the month is likely.

We shall be prepared.

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