The Dow Report: Market Confirmation
By Tim W Wood CPA, March 18, 2005
Today, I want to take a brief look at where the market stands in regard to both bullish and bearish confirmations. To begin with, we always look at the Dow Jones Industrial Average in relationship to the Dow Jones Transportation Average. As you can see in the daily chart below, the Transports have confirmed the recent highs made by the Industrials. This confirmation has occurred on a Secondary level in that it is subordinate to the longer term Primary Dow theory non-confirmation that dates back to 1999 and 2000. This is not to imply that we take this Secondary non-confirmation lightly, as we should not. This is only to point out that we do have a difference between the Primary non-confirmation, and the Secondary confirmation.
Therefore, at the Primary level the bearish non-confirmation continues to be a bearish omen for the market. But, on a Secondary level the market still remains bullish. According to Dow theory, this Secondary bullish confirmation will remain intact until the previous Secondary low point is violated. I'll discuss this violation when and if it occurs. Until then, the Secondary up trend, according to Dow theory, remains intact.
However, when we look at other indexes, we find that the rally into the March high has not been a broad-based affair as many other indexes have yet to confirm the Industrials. Below is a chart of the Industrials and the Nasdaq 100. This latest non-confirmation is marked in red and this is a serious warning that something is wrong in the market place.
Below is a chart of the Industrials and the Banking Index. The Banking Index also peaked in December and has thereby also failed to confirm the Industrial's March high.
Next we have the Morgan Stanley Consumer Index. This index peaked in February and has since begun to break below recent support levels. This is telling us that the consumer is beginning to slow down. If we see this index break decisively below the January/February support levels, then it will mark the first important break for this index in over a year and that could then begin to put more pressure on the Industrials.
In addition to the non-confirmation between the Industrials and the Consumer Index, we have the non-confirmation of the Retailer Holders Index. This non-confirmation by the Retailers serves to confirm the slow-down being seen in the Consumer Index. I will also add that I have found that when the Retailers fail to confirm the Industrials, it often serves to mark important market turn points. If we see the Retailers break below the December to February support levels, then this too should confirm that the consumer is beginning to slow down, which should also begin to weigh on the Industrials.
Another index that we have talked about here before is the Dow Jones Auto Manufactures Index. This index has been in trouble for a year as it last confirmed the Industrials in January 2004. Then, right out of the blue came GM's very negative announcement that they cut earnings expectations by 80%. This non-confirmation was evidence that something was wrong as are the non-confirmations that we are seeing in many other indexes today. This is the type of news that comes when such non-confirmations exist. Just as the great Dow theorists of the past explained, the averages are a barometer that discount the future. The year long non-confirmation by this index is a perfect example of how it was already discounting the news that is just now becoming public. This index has recently violated its previous secondary low point and this puts the Dow Jones Auto Manufactures Index back into a confirmed bear market.
Below we have the Dow Jones Real Estate Index. This index topped in December and has since failed to confirm the recent advance seen by the Industrials. This non-confirmation is a sign of weakness and is suggesting that perhaps we are beginning to see a bit of a slow down in the housing sector. The next development to watch for is a break below the January lows on the Dow Jones Real Estate Index. Should this occur it will mark a trend change of at least intermediate degree for the Real Estate sector.
With the Nasdaq, Banking Index, Consumer Index, Retailers, Auto and now even Real Estate failing to confirm the recent advance seen by the Industrials, the warning is clear. These non-confirmations are all looking ahead and discounting the future. The Auto Makers are now clearly leading the way down, but there are many other non-confirmations that are warning of negative news. As the Industrials have continuously pushed higher into this great bear market rally, the bear has once again been quietly setting the stage. We can’tbe sure just yet if the bear is actually ready to take control. But, I do know that he has lulled the general public into a fearless sense of calmness and complacency as he has kept the average investor focused on the Industrials and the S&P. All the while he has been setting the stage for Phase II of what could potentially be the greatest bear show on earth. Until we see these non-confirmations corrected, extreme caution is warranted.
Tim W. Wood
© 2005 Tim Wood