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Dow Theory Gives Warning; Can the Fed 'Print Over' It?


Dow Theory warns of a trend change; but is this warning still valid in a market back-stopped by QE-Infinity?

So, if the dollar represents the hard work of the American people, then it should be equally as valuable as that hard work. But if the dollar represents the hard work of the American people plus a few trillion extra dollars that represents nothing more than the "hard work" of a printing press, then the value of this symbol becomes accordingly diluted and uncertain.

Incidentally, this is how your wealth is depleted by inflation. Each day you go to work expecting to earn a certain amount... and, naturally, your expectation of the value of what you're earning is measured by what that money was able to buy in the past. But every day the printing press runs, that value is diluted. Thus we are always being paid a little bit less than we think -- we're simply not aware of it because we base our expectations of "value" on past experience; and we are unable to foresee how our purchasing power will be diminished in the future.

The point I'm getting at is that when Mr. Dow was making his market observations, the rules of the whole game were different, and money had some discernible -- and reasonably consistent -- level of value. In the early 1900s, the price of the Industrials and Transports was more directly tied to economic production. In today's world, the price of equities is not necessarily even relevant to the real economy, and is sometimes relevant only to the amount of liquidity flowing into the market from the central banks (printing).

Should Dow Theory still have any credence in today's world of QE-Infinity? I genuinely don't have an answer to that question: we are in uncharted waters.

The Transportation Average does seem to be pointing the way, for the "real" economy anyway, and important constituent companies such as FedEx (NYSE:FDX) and Norfolk Southern (NYSE:NSC) have recently expressed serious concerns regarding future economic outlook. The global economy appears to be weakening further. Will reality bite the market sooner rather than later, or will the printing press allow the Industrials to continue behaving in an oblivious fashion? That's where things are challenging from an analytical standpoint.
No positions in stocks mentioned.
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