The Dow Report: Signs of Tightening Consumers

By Tim W Wood CPA, September 30, 2005

The evidence of tightening consumers is beginning to show up in several indexes. But, is this just a temporary pause in the economy, or something more substantial?

The first index that I find to be key is the Retail Holders Index. A few weeks ago we looked at this index and it is now once again time for a review of this chart. The upper chart shown below is of the Industrials and the lower chart is the Retail Holders Index. The first thing I want to point out is the non-confirmations that have occurred at previous intermediate term market tops. The non-confirmations that have occurred at market tops are noted in blue, while the non-confirmations at market lows is noted in green. Notice that we saw a non-confirmation at the August high and that from that top the market has been soft. Also, since that non-confirmation the Retailers have broken down and more recently have violated their most recent short-term low. This break is noted in red. But, thus far the Industrials have held above their corresponding low. This now means that the market is perhaps at another important juncture. More on this later as it develops.

The next chart below is the Dow Jones Furnishings and Appliance Index. Not only did the advance out of the 2002 4-year cycle low top in early 2004, but the rally out of the 2004 low has failed, and now this index is making new lows for 2005. These new 2005 lows are marked in red and occurred with the violation of the April lows. So far, this decline has found support at the 2004 lows. This support level is marked in blue. This index is clearly showing us that the consumer is pulling in his horns and if the 2004 lows are breached, it will mean that further tightening should be expected. Such continued tightening by the consumer should then spill over into other areas of the economy.

The next chart below shows the Industrials in the upper window and the Dow Jones Auto Manufactures in the lower window. The Auto Manufactures also topped out in early 2004 and began to form a long-term non-confirmation with the Industrials. It seems that in spite of the "Employee Discount" programs and other incentives that have been seen over the last year or so, the consumer has definitely been pulling back on Auto purchases, and by the looks of this chart, this is likely to continue. At the April low the Auto Manufactures Index had given up 75% of its advance from the 2003 low into the 2004 high. Now, the April low is once again being challenged by this index and if violated, this too should spell additional trouble for the economy as the consumer will have then tightened another notch. Does anyone remember the "R" word? Oh, that's right, that word is no longer used or needed because of the new paradigm in which we live. Right!

These are but a few examples of a slowing economy. Between the natural force of the market, high energy costs and rising interest rates, just to name a few, we are beginning to see signs of a coming slow-down just as the Dow theory has been telling us all along.

More specific technical research on the markets including targets and timing are available through Cycles News & Views.

Tim W. Wood

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Tim W. Wood CPA
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