About The Dow, and Dow Theory
The Dow Theory had a simple premise. You had to buy raw materials before you could make things, and after you bought them, you had to move them next. Then you could make. Last to show the economic upturn was retail as the raw materials were long ago bought, shipped, and manufactured (and shipped again) prior to actually being sold. I think there is still merit in that system.
Unfortunately, the Dow Jones “Industrial” Average long ago diverged from the original Dow Theory. As it was often quoted in the news, there was a desire to “juice it up” by including the current hot area of the economy. Oddly, often just as that ‘hot property’ went flat… a tendency to select really large and Name companies also selects for companies just after their big growth is over and as they enter staid low growth dominance…
Every few years they continue this ritual of swapping companies, and coming up with a fudge number to multiply each price so that the Index stays continuous. It works, sort of. Just don’t make the mistake of thinking these are Industrials in the Dow Theory sense.
Dow also had averages for Transportation, Utilities and some others. Often forgotten in the popular news. So saying “Dow Average” is ambiguous. Oh Well.
So what does the DOW look like today? This link gives quotes on the 30 Dow Industrials:
Company Price Change % Change Volume YTD change MMM 3M 143.44 +0.09 +0.06% 1,739,899 -12.19% AXP American 77.25 -1.51 -1.92% 1,935,968 -16.82% Express AAPL Apple 108.25 -4.40 -3.91% 51,511,979 -1.68% BA Boeing 132.52 -4.50 -3.28% 3,242,813 +2.40% CAT Caterpillar 75.40 -1.01 -1.32% 4,234,376 -17.23% CVX Chevron 77.99 -1.25 -1.58% 5,334,361 -30.48% CSCO Cisco 26.99 -0.05 -0.18% 18,061,544 -2.71% KO Coca-Cola 39.88 -0.67 -1.65% 7,730,790 -5.12% DIS Disney 99.23 -0.79 -0.79% 16,594,259 +5.83% DD E I du Pont 52.16 -0.25 -0.48% 2,409,132 -25.51% de Nemours and Co XOM Exxon Mobil 73.61 -0.95 -1.28% 8,416,088 -20.24% GE General Elec 24.61 -0.58 -2.32% 19,549,388 -2.18% GS GoldmanSachs 191.31 -5.44 -2.76% 1,647,155 -1.02% HD Home Depot 118.67 -1.87 -1.55% 3,330,008 +13.02% IBM IBM 151.43 -1.23 -0.81% 2,008,895 -5.54% INTC Intel 27.14 -0.39 -1.40% 19,059,298 -25.30% JNJ Johnson 97.24 -0.80 -0.82% 5,437,122 -6.89% & Johnson JPM JPMorgan 64.38 -1.56 -2.37% 9,740,028 +3.24% Chase MCD McDonald's 97.97 -1.78 -1.79% 3,763,433 +4.59% MRK Merck 56.77 -0.18 -0.32% 5,533,531 +0.30% MSFT Microsoft 44.54 -1.12 -2.45% 20,706,615 -4.41% NKE Nike 107.59 -4.71 -4.20% 3,321,457 +12.40% PFE Pfizer 34.08 -0.47 -1.36% 10,512,852 +9.79% PG Procter 73.01 -0.90 -1.22% 5,066,448 -19.60% & Gamble TRV Travelers 103.78 -1.92 -1.82% 627,846 -1.78% UTX United Tech 94.00 -1.82 -1.90% 2,525,160 -18.03% UNH UnitdHealth 116.22 -3.57 -2.98% 1,819,670 +15.03% VZ Verizon 46.43 -0.45 -0.96% 6,798,665 -0.41% V Visa 72.03 -1.92 -2.60% 5,020,950 +10.18% WMT Wal-Mart 67.18 -1.25 -1.83% 4,520,889 -21.72%
One simply MUST ask what makes Wal-Mart, Visa, Verizon, Microsoft, JP Morgan Chase Bank, Home Depot, Disney, Chevron, and American Express “Industrials”? I can maybe make a case for Chevron and Exxon since they “make” oil and gas products… but since when did financials and retail become “industrials”?… Certainly not in Dow theory.
Oh Well. IIRC, he originally had 10 industrials. If I really cared, I could pick a dozen giant industrial companies (but would likely need a global set for his theory to be applied in the modern world) and create an index in the original spirit.
So, keeping firmly in mind that the “Industrials” is really just a “very large cap broad economy fund”, what is it doing today?
Here is a 2 year chart of the Dow ( I’m just going to call it that, since constantly typing “Industrials” when it isn’t is kind of silly…), While a 1 year chart is useful for trading, the 2 year gives a better context to things (by including more prior anomalies and seasonal shifts) while the 10 year can provide even longer context.
The first thing to notice is that for 2 years, and despite ‘corrections’ when prices would fall out of bed for a while in a petite-panic, the three Simple Moving Average lines stay stacked with fastest on top, then the middle speed, and the slowest one on the bottom. I call that the “SMA Stack”. In more volatile stocks, those dips show up as a decline of the fast SMA line sometimes to a bit below the slowest, but not an entire inversion of the stack, then a rapid return to the normal bull market SMA Stack. This, being an average of many stocks, is even more ‘tame’ and disciplined.
Now, look at the far right end of the graph. The SMA Stack has inverted…
Yes, I know, the blue middle 100 day line is not quite below the red 150 day line, but it is clearly headed for a crossover given the down day we are having now. I often use a ‘faster set’ of about 25, 50, 75 days and it is fully crossed over. Many market mavens use a classical 50 day vs 200 day two line SMA set to define “bull” (rising) and “bear” (falling) markets. I find that very useful for telling you what is blindingly obvious just a few weeks too late to be useful… so use a faster set. The risk of a faster set is more “falses” as it calls a decline that is only a “correction”. I’d rather be out for a “normal 10% to 20% correction” than in, waiting to be told AFTER I’ve lost 20% that it isn’t a “correction” after all, but a bear market that is now confirmed…
At any rate, those SMA lines have done a dandy job of saying “bias to stay in” for the last 2 years. Now they are saying at a minimum “time to step aside for the ‘correction'” and most likely “this is a reversal of trend for a longer period of time”.
Once we have 50 under the 200 day moving average, there will be a flood of folks headed for the exits as that is the indicator they follow. Best not to be at the rear of that pack.
Now let’s skip down to MACD. Moving Average Convergence Divergence. This just makes a couple of moving averages (like those SMA lines) of two different time intervals, and asks “Are they getting closer or further apart?”. It shows the acceleration and direction of that force in prices. In theory you can get the same information by eyeballing those SMA lines (if the times are set the same). In reality, they use two different types of moving average (SMA is Simple, but EMA is Exponential Moving Average and weights recent moves more heavily so moves faster) and while very similar to the SMA stack, it is much more ‘twitchy’; so our SMA Stack set our bias to “be in” for 2 years, but that MACD had lots of ups and downs telling you at crossovers to get out, or back in, of each correction and wiggle.
The position relative to the ‘zero line’ is a more accurate match to the SMA stack. Staying mostly above the zero line for most of that run (dipping below when price takes a big whack in a ‘correction’ and saying ‘buy now’ at the crossover in those dips). Then about last April it more or less merged with the Zero Line. That’s part of the “topping signal”. Things just went flat. (You can eyeball that at the same time price went flat and volatility started leaving. That’s your first call to exit. Then, in June, it clearly went below zero and on the ‘rise’ only touched zero again, not getting through it, in that late July rise of prices back to the merged SMA stack lines. That is what I call a “topping weave” and it is the Last Call to get out without loss. Now the MACD is cleanly below the zero line. Time to have been in cash for a while.
Also, with the rollover of the SMA Stack, our bias shifts to “time to be short or out”, so any “buy the dip” as MACD has a crossover to “blue on top” (but below zero) has to be a very short term trade and get out at the return to the SMA lines.
Note that the black blobs around the zero line are just the difference in MACD lines expressed in a different way. The ‘zero crossings’ matching the point where red/blue cross and the big ranges being when red and blue are far apart. Just some folks like the same information in a different visual.
DMI+ DMI- ADX:
The bottom scale isn’t as useful at this time scale on an average, but it still can have some use. ADX tells you the strength of moves. When something big is happening, that black line rises. As the move fades, ADX inflects and warns “Things are Changing”. Look at that rocket out of the ‘correction’ back in Nov 2014. “Blue on top” clearly saying “buy and ride this puppy”. Then blue inflects, saying the move is fading, but ADX is still not inflected saying “But it’s not dead yet”. Then, in December, ADX goes flat and starts to inflect, that is the “last call” for that run up. (Followed by another “correction” in January…)
So while it doesn’t set the bias at this time scale, it does give a good warning when a strong trend is going flat and when “last call” is happening.
Now look at the right end. “Now”. Red is on a spike up, and black ADX is just starting the rise. Time to be sold out and / or short, and neither one of them anywhere near an inflection. Red has to inflect first, then when it crosses black get ready to take off shorts (set stop losses or tighten trade rules) and watch out for the “last call” inflection of ADX.
Notice how it spikes at the bottom of “corrections”? Notice that given the depth and strength of this drop volume is not at all near what it was in Dec 2014? We don’t have “panic” yet. Market makers live on volume. At tops, volume dries up. After a while, they NEED some volume to pay for their NYC flat and boat at the Marina… and if you won’t buy more, well then, how does a good panic work?… and they begin to short. Heavily. Eventually your stop loss sell orders get hit (Volume!) and then folks start to call their brokers (who say tsk tsk negative things about The Story Of The Day) and folks sell (Volume!) and that causes more drops (and more shorting) and more Volume!… Once a good strong volume spike is in the bag and commission checks cashed, short covering comes in and you get a bounce back up. That can be a long time in the future if a market has gone to bear market rules.
But we don’t have that much volume yet… Which implies not enough panic yet… Which implies more major financial houses will short a lot more until you are properly panic stricken.
So when you get a ‘topping weave’ and any ‘last call’ indications, look at volume to see if it is low and quiet. Look at that gold average volume line. Notice the sag in July and Aug of 2014 just before those “corrections”? Notice the sag May through July of this year? Notice that we’re going down hard now? Market Makers and Investment Banks live on VOLUME. They don’t give a damn if the market is going up or down, both give a commission. And if you won’t buy stock, they can damn well short sell your stock (that “hypothecate” agreement you signed…) and once you have enough panic, and “sell”, they will buy and use it to cover their short (backed by your original stock…) and have that volume they crave.
In an up bias, volume spikes are times to buy, matching the traders. In falling bias markets, they are just time to cover shorts (that are put back in place when price touches the SMA stack again and volume dries up), again matching the traders.
A Longer View
This is the Dow on a longer time scale. 10 years. Weekly tick marks.
On this time scale you can clearly see the massive volume spikes on a major market crash. Then look at the long slow decay of volume up to today. That gives some context to what Volume! really looks like. Now those recent “corrections” hardly look like a blip of a ripple… So don’t get too excited if recent volume looks like a ‘big’ spike up. Keep your context with a longer term chart.
Notice, too, that throughout the 2008 / 2009 crash, prices stayed below an inverted SMA stack. Now look at the right hand “now” and note that prices are headed below an inverting SMA stack. Bias is strongly to be out until this is clarified.
Also, on this time scale, we get cleaner indications from MACD above or below the zero line. Look back at the crash, it was above zero during good times, then went below Dec 08 just at the topping weave end, and stayed below until Mid 2009 when it was all clear to get back in. Stays above until mid 2011 (when you could sit out for a year and miss nothing) and then goes back to above zero. Now, at the far right, “dancing with zero”. Not yet cleanly below, but with the rest of the context, clearly saying “risk off”.
Similarly DMI- DMI+ ADX are cleaner at this time scale. Being strongly “red on top” through the crash, and when ADX inflected, it was just about the bottom and time to buy back in. (Though even if you waited for ‘blue on top’ it was a decent call. Safer, but you missed a bit of the ‘juice’ of buying at the exact bottom). From that point forward “blue on top” is making money, and trading out (or using options to protect) at ADX inflections when blue is on top but trading back in when red / ADX inflections say the dip is over. And where are we now? Blue is near dead at 10. Red DMI- is rising rapidly well in the lead over ADX. Neither one near an inflection. That says more is likely to come to the downside.
Finally, I put the Dow Utilities index on this one along with the Russel 2000. The 2000 smaller stocks often move faster and further in both directions that the large monsters in the Dow Industrials. And, in a “risk off” bias, classical money managers use Utilities as a “risk off” asset. We can see how The Big Boys are moving that money in the rise of Utilities as the RUT rolls down (at the right side). In 2013, you can see Utilities just laying flat while money runs into “risk on” investment in smaller cap RUT stocks. Then in 2014, RUT goes more volatile and with flat / decline and Utilities “catch up”…
So that move out of RUT and into Utilities now says that lot of money managers (who swing $Billions… your $Thousands just don’t move markets…) are in a “risk off” mood. Look back at 2006 and 2008. Though compressed by the scale, you can see those “counter moves” in those two clearly. Note that while Utilities held up longer into the Crash, they, too, eventually join the herd headed down. So it can be reasonable to take a ‘risk off’ move into utilities, but once the “topping weave” has clearly and cleanly resolved into a full on Bear Market Panic, it’s “be in cash” and toss the utilities too.
So there is likely a nice trade in utilities for a couple of months, but don’t think that means anything on the years scale…
So that’s the close up on The Dow Industrials. I typically never trade it. I usually trade the SPY or RUT, or go long the Nasdaq QQQQ. It can be useful as an indicator, but is so stuffed with staid non-movers that you just don’t get as much gain (or loss) out of it.
But it is fairly well behaved on a chart. When bias is to “be in”, owning QQQQ and RUT gains more. As things age to more ‘slow and steady’ a swap of some positions to SPY is nice. In a ‘topping weave’ I’d rather be in cash, but a move to a “balanced fund’ approach of Dow Industrials, Utilities, and Bonds does a decent job of ‘preservation’ while avoiding a lot of the drop; and still lets you “participate” if you had a missed-call on the top.
As usual: YMMV, for entertainment only, not offering any financial advice to anyone, you can and will lose money, I’m only saying what I do and describing how I read charts, blah blah blah…
Your comments about the brokers need for volume is very thought provoking, sounds like a strong incentive for boom bust markets to me.
I have been waiting for a 10% correction from the highs (at least for the DOW) since about Feb. of 2014.
So I dumped some money in the market today.
I am a contrarian.
Well see how well it works out.
I have noticed that the market goes down faster these days than in the past, but it seems to rise faster also.
I think it is an artifact of program trading.
Well, 530 down at the close.
Monday will be interesting… I’d expect a down open, then a reversal in the afternoon as the “market makers” bank some profits off the shorts to date. When prices rise to the SMA stack, that’s when the shorts get re-applied.
Nice ‘rebound trade’, but don’t mistake it for anything other than a trade… (And use an hourly tick mark chart to decide on such ‘day trades’ and ‘swing trades’… the daily charts are for longer time horizons).
Very much an artifact of program trading and computerized front running.
FWIW, I’d have guessed about 10 AM PT ( 1 PM ET) Monday as the ideal time to “dump some money in”. We’ll see which of us is right…
Today is an options expiration and sometimes those do have a ‘gap up’ open Monday…
From that second link:
That’s basically the reason I shifted from being an “investor” to a “trader”. It became clear that the game was being managed. It’s also why, despite strong reasons to think a top was in a couple of years back, it has continued to rise. The Fed, printing $Trillions, being flowed at zero interest into major ‘banks” (that now can also be trading houses as Glass-Steagall is gone) lets them bid up the paper asset world to any degree desired; and incidentally lets them haul out that support any time they want… In that context, “investment” doesn’t really exist it is just a large casino where the “house” can decide if the “odds” ought to be positive or negative on any given date…
Heard an interesting term the other day. “FANG” trade. Facebook, Amazon, Netflix, Google. The financial news was all ‘atwitter’ about even the FANG trade being down… Might do a set of charts on them ;-)
It isn’t “rigged”, it is “policy” ;-) /sarc;>
But really, anyone remember when the markets crashed and The Government voted to shove $700 Billion nearly overnight into things just to assure their portfolios didn’t drop? That was the start moment. I just never expected them to run it this long and have The Fed balance sheet grow to such an unsustainable level…
The “end game” of this global round of “inflate the leaky balloon” (as The Fed and other central banks have spread the money globally) has been a greater than rational “recovery” (of paper assets, not actual jobs and production) and the real economy arriving at a point of stagnation with all the Monetary Policy tools nearly worn out. (Where do you cut from 0%? If you loosen reserve requirements from here, what then prevents more rampant failures? How do you flood more $Trillions than this into things without the $US dropping like all the other global currencies?…)
In any case, it will be fun to watch.
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Tesla is supported by government subsidies of 50%. Did you say rigged? Congress may zero out the subsidies. Changing the rigging.