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Encyclopedia > Dow Theory
Financial markets

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This article does not cite any references or sources. ... Download high resolution version (480x640, 110 KB)Blockade in front of NYSE. Picture taken in April 2004. ... The bond market, also known as the debit, credit, or fixed income market, is a financial market where participants buy and sell debt securities usually in the form of bonds. ... This article does not cite any references or sources. ... A corporate bond is a bond issued by a corporation. ... A government bond is a bond issued by a national government denominated in the countrys own currency. ... In the United States, a municipal bond or muni is a bond issued by a state, city or other local government, or their agencies. ... Bond valuation is the process of determining the fair price of a bond. ... In finance, a high yield bond (non-investment grade bond, speculative grade bond or junk bond) is a bond that is rated below investment grade at the time of purchase. ...

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A stock market is a market for the trading of company stock, and derivatives of same; both of these are securities listed on a stock exchange as well as those only traded privately. ... For other uses, see Stock (disambiguation). ... A preferred stock, also known as a preferred share or simply a preferred, is a share of stock carrying additional rights above and beyond those conferred by common stock. ... Common stock, also referred to as common shares, are, as the name implies, the most usual and commonly held form of stock in a corporation. ...

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A derivatives market is any market for a derivative security, that is a contract which specifies the right or obligation to receive or deliver future cash flows based on some future event such as the price of an independent security or the performance of an index. ... // A credit derivative is a financial instrument or derivative (finance) whose price and value derives from the creditworthiness of the obligations of a third party, which is isolated and traded. ... Definition A hybrid security, as the name implies, is a security that combines two or more different financial instruments. ... In finance options are types of derivative contracts, including call options and put options, where the future payoffs to the buyer and seller of the contract are determined by the price of another security, such as a common stock. ... In finance, a futures contract is a standardized contract, traded on a futures exchange, to buy or sell a certain underlying instrument at a certain date in the future, at a specified price. ... This article does not cite any references or sources. ... For the Thoroughbred horse racing champion, see: Swaps (horse). ...

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Chicago Board of Trade Futures market Commodity markets are markets where raw or primary products are exchanged. ... Over-the-counter (OTC) trading is to trade financial instruments such as stocks, bonds, commodities or derivatives directly between two parties. ... Real estate is a legal term that encompasses land along with anything permanently affixed to the land, such as buildings. ... Template:The Spot Market The Spot Market or Cash Marketis a commodities or securities market in which goods are sold for cash and delivered immediately. ...

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Finance studies and addresses the ways in which individuals, businesses, and organizations raise, allocate, and use monetary resources over time, taking into account the risks entailed in their projects. ... This article does not cite any references or sources. ... There are two basic financial market participant catagories, Investor vs. ... Domestic credit to private sector in 2005 Corporate finance is an area of finance dealing with the financial decisions corporations make and the tools and analysis used to make these decisions. ... Personal finance is the application of the principles of finance to the monetary decisions of an individual or family unit. ... This article does not cite any references or sources. ... For other uses, see Bank (disambiguation). ... Financial supervision is government supervision of financial institutions by regulators. ...

v d

Dow Theory is a theory on stock price movements that provides a basis for technical analysis. The theory was derived from 255 Wall Street Journal editorials written by Charles H. Dow (18511902), journalist, founder and first editor of the Wall Street Journal and co-founder of Dow Jones and Company. Following Dow's death, William P. Hamilton, Robert Rhea and E. George Schaefer organized and collectively represented "Dow Theory," based on Dow's editorials. Dow himself never used the term "Dow Theory," though. The word theory has a number of distinct meanings in different fields of knowledge, depending on their methodologies and the context of discussion. ... It has been suggested that some of the information in this articles Criticism or Controversy section(s) be merged into other sections to achieve a more neutral presentation. ... The Wall Street Journal is an influential international daily newspaper published in New York City, New York with an average daily circulation of 1,800,607 (2002). ... --204. ... 1851 (MDCCCLI) was a common year starting on Wednesday (see link for calendar) of the Gregorian calendar (or a common year starting on Friday of the 12-day-slower Julian calendar). ... Year 1902 (MCMII) was a common year starting on Wednesday (link will display calendar) of the Gregorian calendar (or a common year starting on Tuesday [1] of the 13-day-slower Julian calendar). ... For other uses, see Journalist (disambiguation). ... The Wall Street Journal is an influential international daily newspaper published in New York City, New York with an average daily circulation of 1,800,607 (2002). ... Dow Jones & Company (NYSE: DJ), based in the United States is a publishing and financial information firm. ...

The six basic tenets of Dow Theory as summarized by Hamilton, Rhea, and Schaefer are described below.


Six basic tenets of Dow Theory

  1. Markets have three trends
    Dow defined an uptrend (trend 1) as a time when successive rallies in a security price close at levels higher than those achieved in previous rallies and when lows occur at levels higher than previous lows. Downtrends (trend 2) occur when markets make lower lows and lower highs. It is this concept of Dow Theory that provides the basis of technical analysis' definition of a price trend. Dow described what he saw as a recurring theme in the market: that prices would move sharply in one direction, recede briefly in the opposite direction, and then continue in their original direction (trend 3).
  2. Trends have three phases
    Dow Theory asserts that major market trends are composed of three phases: an accumulation phase, a public participation phase, and a distribution phase. The accumulation phase (phase 1) is when investors "in the know" are actively buying (selling) stock against the general opinion of the market. During this phase, the stock price does not change much because these investors are in the minority absorbing (releasing) stock that the market at large is supplying (demanding). Eventually, the market catches on to these astute investors and a rapid price change occurs (phase 2). This is when trend followers and other technically oriented investors participate. This phase continues until rampant speculation occurs. At this point, the astute investors begin to distribute their holdings to the market (phase 3).
  3. The stock market discounts all news
    Stock prices quickly incorporate new information as soon as it becomes available. Once news is released, stock prices will change to reflect this new information. On this point, Dow Theory agrees with one of the premises of the efficient market hypothesis.
  4. Stock market averages must confirm each other
    In Dow's time, the US was a growing industrial power. The US had population centers but factories were scattered throughout the country. Factories had to ship their goods to market, usually by rail. Dow's first stock averages were an index of industrial (manufacturing) companies and rail companies. To Dow, a bull market in industrials could not occur unless the railway average rallied as well, usually first. According to this logic, if manufacturers' profits are rising, it follows that they are producing more. If they produce more, then they have to ship more goods to consumers. Hence, if an investor is looking for signs of health in manufacturers, he or she should look at the performance of the companies that ship the output of them to market, the railroads. The two averages should be moving in the same direction. When the performance of the averages diverge, it is a warning that change is in the air.
    Both Barron's Magazine and the Wall Street Journal still publish the daily performance of the Dow Jones Transportation Index in chart form. The index contains major railroads, shipping companies, and air freight carriers in the US.
  5. Trends are confirmed by volume
    Dow believed that volume confirmed price trends. When prices move on low volume, there could be many different explanations why. An overly aggressive seller could be present for example. But when price movements are accompanied by high volume, Dow believed this represented the "true" market view. If many participants are active in a particular security, and the price moves significantly in one direction, Dow maintained that this was the direction in which the market anticipated continued movement. To him, it was a signal that a trend is developing.
  6. Trends exist until definitive signals prove that they have ended
    Dow believed that trends existed despite "market noise". Markets might temporarily move in the direction opposite the trend, but they will soon resume the prior move. The trend should be given the benefit of the doubt during these reversals. Determining whether a reversal is the start of a new trend or a temporary movement in the current trend is not easy. Dow Theorists often disagree in this determination. Technical analysis tools attempt to clarify this but they can be interpreted differently by different investors.

In finance, the efficient market hypothesis (EMH) asserts that financial markets are informationally efficient, or that prices on traded assets, e. ... Barrons magazine is an American weekly newspaper covering U.S. financial information, market developments, and relevant statistics. ... The Wall Street Journal is an influential international daily newspaper published in New York City, New York with an average daily circulation of 1,800,607 (2002). ...


As with many investment theories, there is conflicting evidence in support and opposition of Dow Theory. Alfred Cowles in a study in Econometrica in 1934 showed that trading based upon the editorial advice would have resulted in earning less than a buy-and-hold strategy using a well diversified portfolio. Cowles concluded that a buy-and-hold strategy produced 15.5% annualized returns from 1902-1929 while the Dow Theory strategy produced annualized returns of 12%. After numerous studies supported Cowles over the following years, many academics stopped studying Dow Theory believing Cowles's results were conclusive. Alfred Cowles (15 September 1891, 28 December 1984) was an American economist, businessman and founder of the Cowles Commission. ... In finance, a portfolio is a collection of investments held by an institution or a private individual. ...

In recent years however, some in the academic community have revisited Dow Theory and question Cowles' conclusions. William Goetzmann, Stephen Brown, and Priyank kumar believe that Cowles' study was incomplete [1] and that Dow Theory produces excess risk-adjusted returns. Specifically, the absolute return of a buy-and-hold strategy was higher than that of a Dow Theory portfolio by 2%, but the riskiness and volatility of the Dow Theory portfolio was so much lower that the Dow Theory portfolio produced higher risk-adjusted returns according to their study. The Chicago Board of Trade also notes that there is growing interest in market timing strategies such as Dow Theory. [2] Stephen Brown may refer to: Adventures of Stephen Brown, a science-fiction series Stephen Brown (judge), a member of the British privy council Stephen Brown (athlete), a competitor at the 2000 Summer Olympics Stephen Brown (columnist), a contributor to The Standard, a business newspaper for Hong Kong Stephen Brown (composer... The Chicago Board of Trade (CBOT) NYSE: BOT, established in 1848, is the worlds oldest futures and options exchange. ...

One key problem with any analysis of Dow Theory is that the editorials of Charles Dow did not contain explicitly defined investing "rules" so some assumptions and interpretations are necessary. And as with many academic studies of investing strategies, practitioners often disagree with academics.

Many technical analysts consider Dow Theory's definition of a trend and its insistence on studying price action as the main premises of modern technical analysis. Look up trend, trendy in Wiktionary, the free dictionary. ... It has been suggested that some of the information in this articles Criticism or Controversy section(s) be merged into other sections to achieve a more neutral presentation. ...


  • J. M. Hurst: The Profit Magic of Stock Transaction Timing. Englewood Cliffs, N.J.: Prentice-Hall, 1977. [ISBN 0-13-726000-8] (Analysis of the empirical character of US stock market movements prior to 1973) {NB: Also, [ISBN 0-934380-62-7]}
  • John Murphy: Technical Analysis of Futures Markets. New York, N.Y.: New York Inst. of Finance, 1986. [ISBN 0-13-898008-X]

External links

  Results from FactBites:
Dow Theory - StockCharts.com (6318 words)
Although Dow theory is attributed to Charles Dow, it is William Hamilton's writings that serve as the corner stone for this book and the development of the theory.
Dow and Hamilton sought to catch the meat of the move and enter during the second leg.
While Dow theory may be able to form the foundation for analysis, it is meant as a starting point for investors and traders to develop analysis guidelines that they are comfortable with and understand.
Dow Theory - MarketThoughts.com (3062 words)
In July 1949, with the Dow Jones Industrials registering a low at 161.60 and with the country in the midst of a severe recession, a new primary bull market was born.
From thereon, the Dow Theory torch was passed on to Richard Russell.
More recently, numerous traders have tried to reduce the Dow Theory to a "system," where a series of confirmations of the Dow Jones Industrials by the Dow Jones Transports (or vice-versa) is taken to be "buy" or "sell" signals without regards to other factors such as valuation, economic conditions, and investor sentiment.
  More results at FactBites »



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