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Real Questions from Real Subscribers

Q: Given that technology is so important to our economy now, what do you think about adding a technology index to the Dow Theory? The original version using only the Industrials and Transports seems outdated.

A: Dear Subscriber,

We look at a variety of indexes beyond the Dow Industrials and Transports, including the S&P 500 Index, sector indexes within the S&P 500 or S&P 1500, and the Morgan Stanley Cyclical Index.

However, the Dow Theory itself relies on just the two Dow averages, and it still works after more than 100 years. We wouldn't presume to change the Dow Theory methodology. For us, the Dow Theory serves one major purpose — to identify the market's majority money opinion, which helps to determine our buy lists' cash position. For that job, the somewhat diversified Industrials and aggressively cyclical Transports work well together.

That said, we acknowledge that technology, health care, and consumer discretionary have grown into larger portions of the economy in recent years. Such market power is reflected in capitalization-weighted indexes like the S&P 500. We do consider technology and other key sectors when we analyze individual stocks or the economy's broad trends.

Thanks for your interest,

Bob Sweet, CFA
Managing Editor, Dow Theory Forecasts

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