Dow theory warning from the Utilities Index

Charles Dow died in 1902, and the investors should thank him for his ever lasting Dow Theory Analysis.


Carrying on this blog theme looking at the Utility stocks. Previous post.
Dow Jones Utility index could trade like the FANGs
Formula for when the Great Stock Market Rally ends



You can learn about Dow Theory here

This post is concerned with the 4th tenet.

Stock market averages must confirm each other

In Dow's time, the US was a growing industrial power. The US had population centers but factories were scattered throughout the country. Factories had to ship their goods to market, usually by rail. Dow's first stock averages were an index of industrial (manufacturing) companies and rail companies. To Dow, a bull market in industrial's could not occur unless the railway average rallied as well, usually first. According to this logic, if manufacturers' profits are rising, it follows that they are producing more. If they produce more, then they have to ship more goods to consumers. Hence, if an investor is looking for signs of health in manufacturers, he or she should look at the performance of the companies that ship their output to market, the railroads. The two averages should be moving in the same direction. When the performance of the averages diverge, it is a warning that change is in the air.

The above is correct in saying the transports should confirm the industrial index, also the utility index ideally should not out perform the transports, this is because the utility index is considered a safe harbor in times of great risk.

If the utilities out perform transports and/or industrial's then the smart money favor safety which indicates they favor water or electric dividend paying companies over trucking, rail road, consumer, technology or financial companies.

This is major sector rotation which signals great risk in the wider market is upon us or very nearly upon us. 

The chart below considered the performance of the Dow Utilities Index vs Dow Transports Index next to previous Dow Industrial major market tops. Conclusion is in black text.

This Charles Dow quote suits the modern day passive investing theme (ie ETFs gone crazy, for more  go here to Mike Green)

Original Post: https://ift.tt/38g33fo