The Dow Report: A Quick Look at Key Indexes

By Tim W Wood CPA, April 8, 2005

The first chart below is of the Dow Jones Industrial Average and the Dow Jones Transportation Average. The January 2005 low marks the last Secondary reactionary low point according to Dow theory. As you can see each of the retests of this low have thus far held and this has resulted in a series of higher lows. But, with today's price action seen in the Transports this may be about to change. From a Dow theory perspective this Secondary reaction separating Phase I from Phase II of the secular bear market remains intact, but on increasingly thinner ice. I also want to make it perfectly clear that this Secondary reaction is subordinate to the existing Primary Dow theory sell signal and non-confirmation.

The fact that the short-term rally, which began out of the April 4, 2005 low, was not confirmed by the weaker price action of the Transports was cause for concern. But, now we have today's break in the Transports. This is becoming increasingly more negative and is suggestive that we are now seeing the development of a small scale non-confirmation that could be occurring at a very critical time for the markets. We will be monitoring this price action for further developments as this Secondary reaction continues to unwind.

Below we have a chart of the Industrials and a chart of the Dow Top Ten Index. The Dow Top Ten is the ten top dividend-yielding stocks within the Dow 30. Notice here that this index failed to better its December 2004 high with the advance into early March. Then, from that failed rally the Top Ten fell below the January low. This is not positive market action and could indeed be telegraphing problems ahead for the overall market.

The next chart I want to look at is the Nasdaq 100. In this case the rally out of the January low also fell short of its December high, but here the top occurred in February. From that failed high the January low was also violated. This too is telegraphing problems ahead for the overall market.

The next chart I want to look at is a chart of the Retail Holders Index. You can see that in this case the top occurred in November, and from that top the market worked sideways into late March when it broke down out of a 4-month consolidation. This break is not only negative for the retailers, but is also a negative that is plaguing the rest of the market.

These charts are telling me that from a Dow theory perspective the rally separating Phase I from Phase II remains intact. But, when I look at these other indexes there are indeed cracks beginning to appear that could well be telegraphing even broader market weakness in the weeks ahead.

With the Nasdaq, Dow Top Ten and the Retailers, among others failing to confirm the recent advance seen by the Industrials, the warning is clear. These non-confirmations are all looking ahead and are most likely discounting the future for the market as a whole. As the Industrials have continuously pushed higher into this great bear market rally, the bear has continued to quietly set 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

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Tim W. Wood CPA
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