The old and generally reliable Dow Theory confirms what the market is demonstrating on Thursday: It's time to sell stocks as the economy barrels toward another recession.
When prices of blue-chip companies comprising the Dow Jones industrial average are rising, the Dow Theory suggests the economy is on an upswing, when stocks in the Dow Transportation index begin to inch up as well. The idea here is that the companies that make products -- Industrials -- need the companies of the Transports Index to get their goods to market.
Here's what has Dow Theorists -- and their mothers -- dumping their stocks on Thursday: Earlier this summer, the Dow Transports Average hit a new high. Those stocks weathered the global economic crisis relatively well, especially compared to the companies that make up the DJIA.Yet the Transport Average has been in free-fall since hitting its July high. When Industrials and Transports decline in tandem, the Dow Theory says it's a sure-fire signal to sell. Indeed, the Industrials alone are down nearly five percent year-to-date.
Of course, another side to the Dow Theory is that buying and holding stocks in the companies that make up these indices is a smart long-term strategy. Despite occasional dips, the baskets of American stocks that make up these averages have fared well over the second half of the 20th century.