Dow Theory in Focus

by Ashraf Laidi
Dec 15, 2016 11:24

Is the Dow Transportation Index inability to close above its recent highs a red flag for Dow Theory followers? The theory holds that new highs (lows) in the Dow Industrials, or Transportation index, must be confirmed by new highs (lows) in the other. Failure to do so could imply that the highs (lows) attained in one index are unlikely to follow. 

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Dow Theory in Focus - Dow Theory Dec 13 (Chart 1)

Although, the Dow Jones Transportation Index did end last week above its 2014 record high, its current decline below the latest highs (and 2014 highs) may raise doubts over the continuity of the advances in the Industrials. A possible reason for Wednesday's stock market selloff could be the disconnect between the Fed's higher than expected 3-rate hikes for 2017 and the modest upward revision in GDP to 2.1% from 2.0% in September. And with Yellen re-highlighting throughout her conference that inflation remains below the Fed' target, the question on whether the spike in yields is too unsustainable gains in validity.

 

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