August 1, 2017
By Mish Schneider
Charles Dow 1851-1902, co-founder of Dow Jones & Co. and founder of the Wall Street Journal, had a theory.
Dow, the real Granddad of technical analysis, instituted the DJIA (Dow Jones Industrial Average) in 1896. That tracked the closing prices of 12 manufacturing companies.
Then, in 1897, Dow created an average for Transportation stocks.
Dow believed that if the industrial and railroad averages moved in the same direction, the economy was shifting in that direction.
Fast forward to the present.
What might he say now that we have the DJIA on new all-time highs while the Transportation Sector ETF (IYT) is down about 7% from its all-time highs?
Should we believe that the blue chips are accurately predicting more bullish economic indicators coming soon to a theater near you?
Should we believe Transportation is more accurately predicting that negative economic indicators will prevail?
Should we simply accept the disparity as an aberration?
Or, should we exercise caution before continuing to load up long or short?
Dow never really got to fully explain his theories before his death. Therefore, much of what he said is open to interpretation.
Naturally, as one who is very much alive, I have taken the idea of Dow’s theory and streamlined it to my economic Modern Family.
The Dow Jones has only 30 stocks in its basket. The top 3 holdings are Boeing, Goldman Sachs Group and 3M Company.
21.94% is Industrials with IT a close second, and Financials in third place.
The Dow has relations with, but is not part of the Family.
Transportation (IYT), our Trans sibling, has 22 stocks in its basket. FedEx, Norfolk Southern Corp and United Parcel Service are its top 3 holdings.
Air Freight & Logistics comprise 29.84% with Railroads second and Airlines third.
What would you say is a more accurate indicator of the current economy?
No contest for me. Of the four major indices, the Russell 2000 (IWM) has more weight given the 2000 stocks that manufacture mainly in the U.S.
Presently, IWM has run out of steam, but has yet to fail the bullish phase.
Furthermore, Transportation reflects how goods and services move, therefore measures the health of manufacturing companies and consumer demand.
Add to the mix brick and mortar Retail, off the lows of the year, but hardly impressive.
If the sum is equal to its parts, you have weakness in two major sectors of the economy while the Russell’s sit on the fence.
Henceforth, Mr. Dow rejoices in his American car, while he rolls over in his grave waiting for a stronger economy.
S&P 500 (SPY) 248-245.68 range to break one way or another
Russell 2000 (IWM) 142.90 big resistance now. Under 140 could see 134
Dow (DIA) Amazingly, another new all-time high
Nasdaq (QQQ) 140.80 support and must get back over 144
KRE (Regional Banks) Confirmed bullish phase. 54.25 pivotal
SMH (Semiconductors) 88.00 resistance to clear. 85.40 the 50-DMA
IYT (Transportation) 164 the 200 DMA. If can clear 166.62 some relief possible
IBB (Biotechnology) 308.50 major support with 322 the place to clear
XRT (Retail) 40.44 support and if holds 41 could see 43.00
IYR (Real Estate) Closed over 81.00 so looks pretty good
XLU (Utilities) Firming
GLD (Gold Trust) 119.50 first MA beneath current price action
SLV (Silver) 15.25 support. Over 16 looks good
GDX (Gold Miners) Through 23.06 looks good
USO (US Oil Fund) 10.00 pivotal. 10.60 big resistance to clear
XLE (Sel Energy Spdr Fd) Like better over 67.25
TAN (Solar Energy) 21.65 pivotal support
TLT (iShares 20+ Year Treasuries) Below 122.80 would be indication of higher rates to come. 124 pivotal 124.80 the 50 DMA
UUP (Dollar Bull) Broke the 200-week moving average unless gets back over 24.20
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