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Dow
Theorists Are Smiling - Care to Know Why? |
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Dow
theorists are most likely pleased at this point, as the theory may well
be suggesting the worst is over, and better days for the market lie ahead.
What's the
Dow Theory? And more importantly, why is it saying the current
scenario is bullish? Great questions. We'll answer both of 'em.
 The
Dow Theory is an old assumption that where one particular Dow index
goes, so too does another one. The two Dow indices in question are the
Dow
Transportation Average, and the broad Dow Industrial Average.
'Old school' theory followers feel pretty strongly about the Dow Transportation
stocks leading the industrials higher or lower. More liberal followers
of the strategy tend to think either one is capable of leading the other.
Either way,
if one of them starts to move in a big way, it may be a hint worth noting.
Why?
As crazy as the idea sounds - and despite the fact that it's a relic
- there may actually be something to it.
We went back
as far as our data would allow, hoping to see if a big move in one index
meant a big move for the other index was brewing. To signal a new uptrend
or downtrend, we plotted a 200 day moving average line for both indices.
If one's truly a 'leader' of the other, we should see a cross of the 200
day line for one of the indices occur before a major move begins for the
other.
While there
were exceptions, more often than not one index did indeed significantly
lead another. Score one for the theory. The 2000/2002 bear market was predicted
by the demise of the transportation sector. And, the bear market associated
with the Great Depression - as well as the post-depression recovery
- were also 'predicted' by the transportation stocks.
 The
problem is, industrials were the leaders about as often as the transportation
stocks were when it came to major turns. For
a full-screen comparison chart of the transportation and industrial indices,
click here.
Could the
moves just be coincidental as opposed to a 'pull'? That's our only
issue with the premise...if one index is on the move, all stocks are apt
to be pointed the same direction sooner or later anyway. So, the strategy
may not really be helpful.
On the other
hand, if a big rally in the transportation sector means a rally in the
industrials is more likely, it's still useful leading data - coincidental
or not.
But isn't
this theory rooted in a century-old idea that centered on railroad stocks
and factories? Yep. However, in the same way the shipping and manufacturing
industries have branched out to all sorts of variations, so too have the
Dow indices - they include all sorts of relevant stocks. If the idea held
water then, then it still could today. Speaking of...
OK, so what's
all of this got to do with here and now?
For the last
three months, energy and basic material stocks have yielded to transportation
stocks. Not even technology stocks - which recently perked up -
have been able to keep up with the Dow Transportation Average.
If the theory
holds up (and if the transports continue to lead), we may have already
seen a major bottom for the entire market.
The jury is
still out, but there's a heck of a lot of evidence here.
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Macro-Trend
Update: Clean Energy & Cool Cars |
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Last year, the
Micro Cap Press adopted clean energy as one of our 'pet' topics.
The industry not only has fiscal implications (which we like), but social
and political ones as well ....a little something for everybody.
 That
said, seeing as how our interest in clean energy is mostly how we can capitalize
on the much-needed technology, we've got a couple of updates regarding
the industry.
We won't go
into detail with either of them today - we just want to plant a
few seeds for discussion later. In the meantime however, feel free to drop
us a line if you've got thoughts or comments (or a stock idea) on the matter.
 Taking
the Wind out of Wind Energy's Sails
Last year (2007)
was great wind power and solar stocks. In fact, despite a little bumpiness,
2008 shouldn't be too shabby either. Unless Congress takes care of some
business though, these stocks may lose their appeal in 2009.
A whole host
of tax credits designed to boost the development of clean energy techniques
will be expiring at the end of the year....and as of yet, those subsidies
haven't been renewed. They are being debated and revised right now, having
gotten through the House, and now in the Senate's skeptical hands.
As much progress
as we've seen, these two industries really aren't self-sustaining yet.
So, a lack of support from the Federal Government may well pull the rug
out from under these companies. It's not panic time yet, but it's worth
keeping an eye on.
Plug It
In
Though hybrid
vehicles have been in focus for quite some time now - in the shadow of
ridiculously high oil prices - their close cousin hasn't gotten anywhere
near as much attention. We'll try and remedy that today.
Electric cars
are far more functional and finding a bigger market than you might think.
And no, we're not generalizing by calling hybrids 'electric'. When we say
electric, we mean nothing but batteries and an electromagnetic motor.
 ZAP
(OTCBB: ZAAP) may be one of the best-known small caps in the field,
but we found at least a dozen companies with a foothold in the arena. By
that same token, we didn't find any major (i.e. big) companies
working on getting anything to the electric car market - they were all
small.
But aren't
these cars too goofy looking to be marketable? That's the interesting
part. They used to look too strange to drive. However, many of them are
starting to look mainstream, if not downright sporty. Oh yeah -
they
also work.
We think the
industry is past the 'speculation' phase, and is now entering its 'early
growth' period.
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Updated: 9:18 am PST (17:18 GMT), January 5, 2009
