April 10, 2008 at 2:00 pm by Tom Lydon
The Dow Theory is one of the most respected trend systems in the investment world, leading exchange traded fund (ETF) investors and others in their market-related decisions.
Charles Dow, founder of the industrial average that bears his name (among other things), created the theory to ascertain when to buy and when to sell. When the industrial and transportation averages make new highs, a buy signal is given; when both make new lows, it is a sell indicator.
John Nyaradi for Seeking Alpha reports that the Dow Trading technical system went negative in November 2007, it sparked debate about whether we had entered a bear market. The Dow Theory proved correct: the market went into a long decline, continuing through the end of the year and into the first quarter of this year.
The Dow Jones Industrial Average has yet to make a new high, with the buy signal a closing at 12,743. Last week saw a rally at intraday 12,790 to close at 12,654. At Monday’s close it was 12,612, proving to be a breath away from a new buy signal.
While ETFs didn’t exist in Dow’s day, modern day followers of the Dow Theory can certainly use ETFs to go both long and short while following it.
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