You know how skeptical I am of market maxims and rules of thumb and pattern recognition in general…
At best, these “signals” work sometimes and there are too many variables that are exogenous to the signal – so that a practitioner cannot know when it’s about to work and when it’s not. They can take a bow in hindsight on a signal foreseen but if things don’t play out, no one really remembers anyway – so it’s kind of like a free call option on pundithood.
I still think there is value in understanding the concepts behind what large segments of the crowd are looking at / watching / discussing. Can’t be a skeptic based on no information and have your skepticism taken seriously.
Which brings me to Dow Theory. I don’t believe in it, but I’m not an expert on how it’s meant to be used and interpreted. Two friends of mine have written it up and I’m reading both takes. Directing you to JC Parets and Larry McDonald below, make your own decision about what any of this might mean:
Dow Theory is something that gets thrown around a lot, usually irresponsibly. What I mean is, that there is a lot more to Dow Theory that what you normally hear about on the TV or read about on the Internets. Usually, conversations about Dow Theory revolve around the Dow Jones Industrial Average and Dow Jones Transportation Average either confirming or not confirming each other’s trends. This is indeed part of Dow Theory, but not even in my top 5 most important Dow Theory Tenets. There are other aspects of Dow Theory that we need to pay attention to even more.
How does one spot the end of a great bull market and the birth of a bear’s mauling? We can start with the Dow Theory.
The Dow theory asserts that major market trends are composed of three phases: an accumulation phase, a public participation (or absorption) phase, and a distribution phase. Bottom line; it’s a classic indicator of real selling. Just before the genesis of a bear market, the weak hands are flushed out. Fast money investors without deep investing commitments run for the hills first. In July, we did a solid job for clients in getting them out of the FAANGs (shorts as well), another classic, fast money hang-out. To us, what makes this indicator so important is meticulously measuring signs of real money selling. In many instances historically, the real selling doesn’t begin until there’s a Dow Theory signal. Beware, we may have touched a trigger Friday.
Let me know what you think here: