Can Investors Trust Dow Theory as Transports Rally?

The Dow Jones Transportation Average (DJT) has surged astir 10% implicit the past month, leaving it little than fractional a percent beneath its all-time precocious acceptable successful November 2024. Under Dow Theory, that should bode good for the broader banal market.

A halfway tenet of Dow Theory is that the DJT should corroborate the banal marketplace trend. In different words, erstwhile the Dow Jones Industrial Average (DJI) is reaching caller highs, the DJT (which ships goods the DJI makes) should beryllium hitting caller highs arsenic well. Otherwise, you wouldn't beryllium capable to spot the trend. In this article, I’ll excavation into the humanities information to spot if the numbers enactment that claim.

Before investigating the halfway rule of Dow Theory, I analyzed DJI returns since 1950. The archetypal array is simply a bully benchmark, arsenic it displays the Dow's returns for timeframes varying from a period to a year. The 2nd array summarizes returns erstwhile the scale is wrong 1% of an all-time high. It shows flimsy underperformance for the one-month timeframe erstwhile the scale is high, though aft that returns are similar, with a spot little volatility according to the modular deviation of returns.

I ran the aforesaid investigation connected the DJT that I did connected the DJI. The archetypal array shows the DJT'S returns since 1950, portion the 2nd array displays returns erstwhile the DJT was wrong 1% of its all-time high.

Unlike the DJI, there’s a large quality betwixt the 2 tables. When the DJT is adjacent a grounds high, it drastically underperforms compared to its emblematic behavior. Over the adjacent year, the DJT’s mean instrumentality has been astir 10%, with gains 66% of the time. When the scale was wrong 1% of its all-time high, however, the mean instrumentality fell to conscionable 2.55%, with lone 53% of those returns positive.

Now, let’s look astatine however those indexes person performed erstwhile some the DJI and DJT are wrong 1% of grounds highs. Based connected Dow Theory, this should corroborate the inclination of the wide banal market, but that is not the case.

We noted earlier that erstwhile the DJI is wrong 1% of its grounds high, without considering the DJT, it returns connected mean 8.07% successful the adjacent year, with 72% of those instrumentality positive. When the DJI and DJT are wrong 1% of those highs simultaneously, the DJI averages a instrumentality of 6.17% implicit the adjacent year, with 66% of the returns positive. Meanwhile, the DJT averages a instrumentality of conscionable 2.43% implicit the adjacent year.