It's no secret that the Chinese index has been a leading indicator of market movement here. Why?

Well, Dow Theory has a potential explanation. http://en.wikipedia.or...

Here's tenet 4:

"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."

China is the manufacturer for the US. The stock market in China, which has been in decline for a longer time than the market here (officially entering into a full-fledged bear market recently) has been telling us that all is not well. A savvy Dow Theorist would have interpreted this to mean that this U.S. "recovery" is...well, not one.

Every U.S. investor should pay close attention to China, for this and other reasons I will elaborate on later.

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