Safehaven | The Abuse of Dow Theory | Printer Friendly Version

October 18, 2004

The Abuse of Dow Theory
by Mike Johnson

Below is a commentary posted at the Dow Theory Project Blog on 17^th October 2004.

I see a stepped up abuse of Dow Theory over the last few months that is rather worrisome in our internet age. I am concerned about a group that is emerging out of Richard Russell's shadow that is both uninformed and undisciplined. I am not going to name names, because for the most part, we are talking only about the last few months and about a group of people who do not reach any significant amount of people. My concern is that some of these prognosticators are selling good candy. Remember, candy may taste good in the short term, but in the long run, it will rot your teeth.

With so many questioning Dow Theory's modern day validity, shouldn't we allow it to rise or fall on its own merits, rather than be undermined by the apologists trying to make it fit their own predetermined outcomes?

What I have been reading of late is a lazy bending of Dow Theory to meet the writers own desired conclusion. In another case, a writer (No, I am not talking about Tim Wood here), frustrated by the current seven month divergence, combined Dow Theory with Elliot Wave Theory to draw a conclusion that would not work if either theory were used individually for the same problem. As the "Self Appointed" protector of Dow Theory heading into the next 50 years, I must defend the very theory which has been confounding all during the difficult last seven months. Dow Theory is open to interpretation and it is public domain. Dow Theory is sometimes fallible, but Bad Dow Theory is 100% fallible.

The emergence of these neophyte "Dow Theorist's" is inevitable coming out of the shadows of Richard Russell's success. He is nearly 50 years its student and teacher, having lived through his own terrible calls and remained humble with his long list of top-notch calls. Richard, for his part, has favored a free market approach to the emergence of the next great Dow Theorist, having never taken an apprentice or reached out to other Dow Theorists in an effort to ensure consistency. The advent of the internet and current explosion of Blogs that can be up in ten minutes and populated with opinions on Dow Theory almost as fast are threatening the quality of Dow Theory information. Could the internet be responsible for creating a homogenized group of Monday morning theorists who seek to apply Brand "X" Dow Theory to meet their predetermined conclusions?

I sound like the "Church Lady" here, and that's ok, because Dow Theory is Special. A living theory that has stood where other theories have fell. The Grandfather of all technical analysis, which to this day, kicks-ass against all the new whippersnappers with their magic investment spiel.

Long before Value minded Benjamin Graham came along with his "Intelligent Investor", Charles Dow, William Peter Hamilton and Robert Rhea had synergistically created the best Value Investing process that ever existed. A way to create wealth in the stock market that when followed properly exposed investors to buying opportunities few will ever see in a lifetime of equity investing.

Bio's for Dow, Hamilton, Rhea, Schaefer, and Russell can be found @ The Dow Theory Project

Ok, now that I have that off my chest I can fast forward to today's interesting market condition.

The Rest of The Weekend Barometer for Oct 17, 2004 can be read @ The Dow Theory Project

Mike Johnson,
DowTheoryProject.com