From the desk of Steve Strazza @Sstrazza

Something we discuss a lot, especially internally, is what we refer to as “New Dow Theory.”

It’s merely the idea that instead of looking at Dow Transports $DJT as the confirming average for Dow Industrials (or the broader market), we should be looking at the Semiconductors index $SOX.

The reasoning behind this is simple, and we won’t get too far into it. The bottom line is that as the US has shifted from a Manufacturing to Services Economy, the methods used to transport modern-day goods and services are very different than they were almost a century ago when Dow Theory was first introduced.

If you feel like going down the rabbit-hole on this like I did, here’s an excellent academic paper on the “Electronic Transport Properties Of Semiconductor Nanostructures.”

As with anything in Technical Analysis, we need to remain flexible and adjust to the new data in front of us. And in recent years at least, one can make a strong argument that the price action from Semiconductors has given us much better information than Transports have.

We don’t know what the right answer is, but we know Transports remain a key cyclical area of the economy, so we simply use both.

In this post, we’ll look at how the two Indexes have performed recently and what signals they’re sending for the broader market.

We’ll then outline trade ideas in a chipmaker and railroad stock that are currently offering a favorable risk/reward.

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