• Investing
  • Stock
Round Table Thoughts
  • Economy
  • Editor’s Pick
Home Stock Dow Theory Flashes Bear Signal
Stock

Dow Theory Flashes Bear Signal

by May 24, 2024
by May 24, 2024 0 comment
Share
0
FacebookTwitterPinterestWhatsapp

Dow Theory is based on the foundational work of Charles Dow, considered the “Father of Technical Analysis.” Many of the tools we employ to better analyze market structure and investor sentiment, from trend analysis to index construction, are derived from Dow’s original essays from the early 20th century.

Dow compared two indexes to gauge the strength of the economy: the Dow Industrials which represented the producers of goods, and the Dow Railroads, which tracked the distributors of goods. If both of these indexes confirmed new highs, then economic conditions were strong and the markets were in a bullish phase.

In the modern age of financial analysis, when the Dow Industrials and Dow Transports (which evolved from the original railroad index) do not confirm a new high, we have a “bearish confirmation,” which indicates trend exhaustion. One of my guests this week on The Final Bar, Jeff Huge of JWH Investment Partners, highlighted this Dow Theory signal, leading us to dig deeper into the methodology. Today, we’ll walk through what this indicator implies for stocks in Q2, and also explore two more modern versions of Dow Theory.

Here, we are showing the traditional version of Dow Theory, with the Dow Industrials in the top panel and the Dow Transports in the bottom panel. Note how the Dow Industrials made a new all-time high recently, pushing above 40,000 for the first time in history. Also note how the Dow Transports have not confirmed this recent high, actually trending lower over the last two months. Because only one of the indexes has made a new high, and that breakout was not confirmed by the other index, Dow would suggest that there is internal weakness in the market and a likely major market top.

Proponents of traditional Dow Theory would cite the long-term success of these signals, which have often provided an excellent early warning sign of danger ahead. Detractors would explain that the Dow Industrials index in 2024 includes lots of “non-industrial” names like banks and service companies. For example, technology stocks like Microsoft and Salesforce are part of the Dow Industrials! And companies like Amazon.com are not included in the Dow Transports, even though they have an exceptionally robust built-in distribution network.

So what else can we do to apply Dow’s theory in 2024? What about if we use the S&P 500 to represent the “old economy” names and the Nasdaq Composite to track the “new economy” companies?

When we go with this “New Dow Theory”, we realize that both the S&P 500 and Nasdaq Composite have already achieved new all-time highs in May 2024. So there is no bearish non-confirmation as we see with traditional Dow Theory. The problem with this approach? The mega-cap growth stocks dominate both of these market cap-weighted indexes! So we’re essentially double counting the largest names.

This has led to me to what I call the “Newer Dow Theory”, using equal-weighted indexes for the S&P 500 and the Nasdaq 100. This should effectively neutralize the mega-cap overweight, particularly in the S&P 500 index.

This is where things get a little more concerning for market bulls. While the S&P 500 has already made a new all-time high in Q2, the equal-weighted S&P is still below its March high. And the equal-weighted Nasdaq 100, while holding up quite well in recent weeks, has also failed to push to a new all-time high.

For now, this Newer Dow Theory comparison suggests market weakness, using Charles Dow’s simple analysis of market trends. As he determined over 120 years ago, an uptrend is a pattern of higher highs and higher lows. So, if the highs aren’t getting higher, the uptrend should be brought into question.

Thus, while traditional Dow Theory has already flashed a bearish signal, I’m watching this Newer Dow Theory as May transitions into June. If we get a bearish non-confirmation on this final chart, or if neither equal-weighted index manages to score another new high, market bears may be proven right as we enter the summer months!

RR#6,

Dave

P.S. Ready to upgrade your investment process? Check out my free behavioral investing course!

David Keller, CMT

Chief Market Strategist

StockCharts.com

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.

The author does not have a position in mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author and do not in any way represent the views or opinions of any other person or entity.

You Might Also Like
  • S&P 500 Tempest in a Teapot
  • Betting Against the Fed is RISKY!
  • Bullish Holiday Seasonality Promises More Gains; Three Value Sectors to Consider
  • AI Boom Meets Tariff Doom: How to Time Semiconductor Stocks
Share
0
FacebookTwitterPinterestWhatsapp

previous post
Surprise! These Grocery Stocks are Crushing 2024 Targets
next post
Surge In TSLA And Strong AMZN Is Not Enough

You may also like

How You Can Reduce Risk and Improve Timing When Swing...

April 13, 2023

Here’s How To Find The Best Upcoming Earnings Reports

January 19, 2025

Use This Multi-Timeframe MACD Signal for Precision Trades

May 7, 2025

Sector Spotlight: Three Takeaways from Seasonal Sector Rotation

August 29, 2023

I Say We’re Setting Up For A Major Bottom

September 24, 2023

MEM TV: Clouds Descending Over the Market?

February 11, 2023

Best Bullish and Bearish OptionsPlay Ideas for the Week!

December 2, 2024

S&P 500 Earnings 2024 Q3: Still Overvalued

January 10, 2025

The Ord Oracle October 30, 2023

October 31, 2023

S&P 500 2023 Q1 Earnings Show Improvement

July 4, 2023

    Stay updated with the latest news, exclusive offers, and special promotions. Sign up now and be the first to know! As a member, you'll receive curated content, insider tips, and invitations to exclusive events. Don't miss out on being part of something special.


    By opting in you agree to receive emails from us and our affiliates. Your information is secure and your privacy is protected.

    Recent Posts

    • Krispy Kreme stock plunges after doughnut chain pauses McDonald’s rollout, pulls outlook

      May 8, 2025
    • Don’t Buy Robinhood Stock… Until You See This Chart Setup

      May 8, 2025
    • UnitedHealthcare sued by shareholders over reaction to CEO’s killing

      May 8, 2025
    • The Unpredictable Stock Market: How to Make Sense of It

      May 8, 2025
    • AMD CEO calls China a ‘large opportunity’ and warns against strict U.S. chip controls

      May 7, 2025

    Popular Posts

    • 1

      Trump-era China sanctions ended by Biden may be...

      June 27, 2024 2,632 views
    • 2

      Walz’s honeymoon with China gets fresh scrutiny as...

      August 9, 2024 2,339 views
    • 3

      Biden appointee played key role in recruiting Chinese...

      June 25, 2024 2,320 views
    • 4

      Shein’s global ambitions leaves some cybersecurity experts fearful...

      July 10, 2024 2,302 views
    • 5

      Harris VP pick spent years promoting research facility...

      August 29, 2024 2,186 views

    Categories

    • Economy (7,009)
    • Editor's Pick (2,066)
    • Investing (538)
    • Stock (2,530)

    Popular Posts

    • 1

      Trump-era China sanctions ended by Biden may be revived under new House GOP bill

      June 27, 2024
    • 2

      Walz’s honeymoon with China gets fresh scrutiny as Harris camp blasts ‘lying’ critics

      August 9, 2024
    • 3

      Biden appointee played key role in recruiting Chinese businesses to Delaware: ‘Longtime friends’

      June 25, 2024
    • 4

      Shein’s global ambitions leaves some cybersecurity experts fearful of Chinese spy threats

      July 10, 2024
    • 5

      Harris VP pick spent years promoting research facility that collaborated with ‘Chinese military company’

      August 29, 2024

    Latest News

    • Krispy Kreme stock plunges after doughnut chain pauses McDonald’s rollout,...

      May 8, 2025
    • Don’t Buy Robinhood Stock… Until You See This Chart Setup

      May 8, 2025
    • UnitedHealthcare sued by shareholders over reaction to CEO’s killing

      May 8, 2025

    Categories

    • Economy (7,009)
    • Editor's Pick (2,066)
    • Investing (538)
    • Stock (2,530)

    Disclaimer: RoundTableThoughts.com, its managers, its employees, and assigns (collectively “The Company”) do not make any guarantee or warranty about what is advertised above. Information provided by this website is for research purposes only and should not be considered as personalized financial advice. The Company is not affiliated with, nor does it receive compensation from, any specific security. The Company is not registered or licensed by any governing body in any jurisdiction to give investing advice or provide investment recommendation. Any investments recommended here should be taken into consideration only after consulting with your investment advisor and after reviewing the prospectus or financial statements of the company.

    Copyright © 2024 RoundTableThoughts.com. All Rights Reserved.

    Round Table Thoughts
    • Investing
    • Stock
    Round Table Thoughts
    • Economy
    • Editor’s Pick

    Read alsox

    The Vanity Trade 2024: All About...

    December 27, 2023

    Rules-Based Money Management – Part 4:...

    May 9, 2024

    New Industry Group Golden Cross Indexes...

    February 4, 2023
    Sign In

    Keep me signed in until I sign out

    Forgot your password?

    Password Recovery

    A new password will be emailed to you.

    Have received a new password? Login here