Thursday, October 25, 2012

When Data Miner was a little boy his dear old Dad told him about Dow Theory that said a move in the Dow Jones Industrial Average needs to be confirmed by increasing volume and a corresponding move in the Dow Jones Transportation Average.  The thought was that if the companies making products were doing well, so should the companies that move those products from the factories to their final markets.  Charles Dow formulated his theory at the dawn of the Industrial Revolution when the transports were the railroad companies.  A look at the tear sheet for the iShares Dow Jones Transportation Average Index Fund (IYT) shows its sub industry exposure to still be weighted towards those railroads comprising 31.6% of the fund with an additional 26.8% in Air Freight & Logistics and 19.2% in Trucking.  The tear sheet also shows a Risk rating of 4.13 (lower than most of the highest ranked funds) and a Reward Rating of 8.8.  These two strong ratings reflect the fund’s Quant rank at 16th place today, its highest in months except for one day in early October.  The fund is basically where it’s been for a couple of years which has convinced many that the rally we have seen in the Industrials over that time may not be for real.  Those bears can also point to the Transports coming down worse than the Industrials in the developing correction of the last month.  Dow Theory isn't clear on whether that correction has run its course or has more to go so that’s where Quant can help.  Both funds are scoring well today with the SPDR Dow Jones Industrial Average Fund (DIA), also known as the Diamond, coming in at 21st place close on the heels of IYT and its highest rank in months.  The Diamond’s tear sheet shows much more color on the charts as it is diversified across those industries that comprise the US economy.  Lower Volatility and Deviation scores, seen on the Red Diamond Risk Rating page, give it a lower Risk Rating of 3.04 and it is basically tied on the Reward Rating at 8.81.  The Fundamental measures favor the Industrials while the Behavioral favor the Transports.  These measures don’t say the correction has necessarily run its course because Quant doesn’t make directional calls.  It does say that these two equity funds look to be among the best to hold for the next few months.   We may be setting up for a sustainable rally that even Dow Theorists can accept but Quant’s intermediate time horizon means that may not happen for a couple months.  Maybe we need a big move down with heavy volume to confirm the correction.  If so, Quant still suggests hiding your equity allocation in China where FXI and GXC are back in 1st and 2nd place today.

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