Richard Russell on Dow Theory

Periodically, after crucial and unexpected turns in the market, the study of Dow Theory gains renewed attention from the public. Because a handful of Dow Theorists correctly interpreted last year's reaction and also predicted this year's historic advance, a good deal of interest has been revived today in this oldest and most indispensable method of forecasting price movements and economic trends.

Now just what is the Dow Theory? Basically, it is a system based on the premise that the closing prices of the Dow-Jones Industrial and Rail Averages give us a complete index of all the knowledge, hopes and fears of everybody who knows anything about financial matters. Each investor, acting on what he knows of his own business and the economy, is represented in an emotionless balance which we call the Averages. For this reason, the effects of coming events (excluding acts of God) always are anticipated by the movements of these two indicators.

Talleyrand, the famous French foreign minister, once remarked: "I know somebody that knows more than anybody, and that is everybody." Financially speaking, that "everybody" is the market. When the majority of informed opinion feels that factors favorable to business are in the offing, stocks are purchased and the market advances. Conversely, when informed opinion feels that conditions are deteriorating, cash is preferred to equity and stocks are sold, thus touching off a decline.

Richard Russell, The Dow Theory Today (December 1, 1958 article)

[Here is another quote from the same book pertaining to this subject]

The basic premise of the Theory is that the averages discount everything. The closing prices of the Dow Jones rail and industrial averages give us a complete index of everything known by anybody that can possibly affect the economy and corporate profits (excluding acts of God). "Consciously or unconsciously, the movements of prices reflect not the past but the future. When coming events cast their shadows before, the shadows fall on the New York Stock Exchange." (Hamilton)

Richard Russell, The Dow Theory Today (February 16, 1959 article)

[Another great quote from same book]

In determining the trend, it is never to be forgotten that the movements of both averages must be considered together. The movement of one average must always confirm the other (although not necessarily on the same day), and conclusions drawn from the action of one average unconfirmed by the other are usually deceptive. The confirmation principle is based on logic. If there is to be a valid increase in manufacturing and production, there will also be an accompanying increase in shipping and transportation. Goods produced, if they are not to sit idly in the warehouses, must be distributed to their destinations. If distribution occurs, some of it will be by rail. Regardless of the fact that other forms of transportation are now competing with the rails, an increase in shipping must affect the rails to some favorable extent. It is not necessary for the rail average to move to new highs in each succeeding bull market, but within a given bull market rails must merely advance above preceding high points to confirm.


Richard Russell, The Dow Theory Today (February 16, 1959 article)