Dow Theory for the 21st Century: Technical Indicators for Improving Your Investment Results

by Jack Schannep

Quick Summary

A modernization and empirical validation of the original Dow Theory, the oldest and most widely referenced approach to stock market timing. Schannep updates the theory's traditional signals by incorporating additional technical indicators and presents a comprehensive track record showing how the modified approach has identified every major bull and bear market with greater accuracy and fewer false signals than the classical formulation.

Detailed Summary

Jack Schannep's "Dow Theory for the 21st Century" represents an effort to preserve the enduring insights of Dow Theory -- originally articulated by Charles Dow, founder of the Wall Street Journal and the Dow Jones Industrial Average, and later formalized by William Peter Hamilton and Robert Rhea -- while addressing its known limitations through the addition of complementary technical indicators.

Part I reviews the traditional Dow Theory, which identifies three types of market movements: primary trends (lasting months to years), secondary reactions (lasting weeks to months), and daily fluctuations. The core signal mechanism requires confirmation between the Dow Jones Industrial Average and the Dow Jones Transportation Average: a new bull market signal occurs when both indices make new highs above their previous secondary reaction highs, and a bear market signal occurs when both make new lows below previous secondary reaction lows.

Schannep presents a comprehensive historical record of every Dow Theory signal from the early 20th century through the present, documenting both the theory's remarkable success in identifying major trends and its occasional false signals or late entries. The give-and-take chapter addresses common criticisms, including the argument that the theory is too slow (signals come after a meaningful portion of a trend has already occurred) and that the Transportation Average has lost relevance as the economy shifted from manufacturing to services.

Part II introduces Schannep's modifications, which preserve the classical framework while adding supplementary indicators to improve timing and reduce false signals. These include the use of percentage-based thresholds rather than subjective assessments of whether a move constitutes a "secondary reaction," breadth indicators that measure the participation of individual stocks in market moves (thereby distinguishing between broad-based and narrow advances or declines), and momentum oscillators that help identify overbought and oversold conditions within the context of primary trends.

The book provides specific, actionable rules: when combined Dow Theory signals and the supplementary indicators confirm a primary trend change, investors should adjust their equity allocations accordingly. Schannep presents backtested results showing that this combined approach would have outperformed both buy-and-hold and classical Dow Theory strategies over multiple market cycles, primarily by avoiding the worst of bear market declines while participating in the majority of bull market gains.

The practical application chapters address implementation details including which index configurations to use, how to handle ambiguous signals, and how to integrate the approach with individual stock selection or mutual fund investing. The book maintains a balanced perspective, acknowledging that no market timing system is perfect and that the primary value of the approach is in avoiding catastrophic losses during major bear markets rather than in optimizing returns during bull markets.