The Dow Report: Non-Confirmations and the Dow 30 vs. the Wilshire 5000
By Tim W Wood CPA, November 18, 2005
According to Dow theory, the Secondary trend remains bullish. However, the recent non-confirmation between the Industrials and the Transports remains and this, in spite of the seemingly ever so popular belief that the Dow theory is no longer relevant, is a reason for concern.
It seems that the primary argument I hear from the public is that the Dow Jones Industrial Average is a mere 30 stocks and that this index is therefore subject to manipulation. In following that logic, let's look at the broadest index available for the U.S. equity markets: the Wilshire 5000. In the chart below I have plotted the Wilshire 5000 in the upper window and the Dow Jones Transportation Average in the lower window. Note that the non-confirmation is slightly different, but nevertheless still existent despite the fact that this index is nearly 200 times larger than the Dow Jones Industrial Average. It would seem to me the fact the DJIA is made up of a mere 30 stocks and supposedly subject to manipulation appears to be, at least so far, a moot point.
In the chart below I have plotted the Wilshire 5000 in the upper window and the Dow Jones Industrial Average in the lower window. Note that the rally out of the April lows carried the broader based Wilshire 5000 to a new recovery high in August, but not the DJIA. I have to ask, if the narrower DJIA was being bought in an effort to hold the market up, then why is it that it failed to make a new recovery high, but yet the broadest index available for the U.S. equity markets did? This does not compute. The Dow 30 should have at least performed as well as the overall market, but it did not. Therefore, this is not supportive of any meaningful manipulation of the DJIA. If the manipulative efforts of the DJIA were that effective, then it certainly should have made new highs along with the broadest U.S. index in existence. I'm not saying that some degree of manipulation doesn't exist. Obviously, the Fed is in the business of manipulation. But, what I am saying is that when you see an average of well over 5000 stocks outperform 30, it's hard to make the case that the 30 were effectively manipulated. As I see it, the Dow 30 failed to confirm the broadest market average of all and that non-confirmation was followed by a decline into the October lows.
Now we have the Dow 30 that have just bettered their summer high while the Wilshire 5000 lags. So again we have a non-confirmation, but this time the narrower index is leading the way up. I have to ask, do you really think it is healthy for the entire market as represented by the Wilshire 5000 to not confirm the Dow 30? The details of such non-confirmations will be discussed in the December issue of Cycles News & Views.
If we look at an even smaller segment of the Industrials we will find yet another surprising piece of evidence. In the chart below we have the Industrials in the upper window and the Dow Jones Top Ten in the lower window. If I use the logic that the narrower the index the easier it is to manipulate, then any such manipulation would surely be seen in an even narrower index of ten measly stocks, right? Wrong! Note that the Top Ten topped out in January 2004 and by doing so did not confirm the March 2005 highs made by the 30 Industrial stocks, much less the August 2005 high made by the Wilshire 5000. In addition, the Top Ten have not only failed to confirm the recent advance by the Industrials, but is weakest of both the Industrials (30 stocks) and the Wilshire (over 5000 stocks). These charts are telling me that the idea of indexes that are comprised of fewer stocks are more easily manipulated just does not seem to hold water. Yes, it’s a logic argument, but the facts, as seen in the form of price bars on these charts, just does not support the argument.
How can it be that over 5000 stocks made new recovery highs in August, yet a mere 30 stocks on the alleged obsolete DJIA failed to confirm that high? If the DJIA was effectively manipulated, it should have out performed the overall market. Then when we look at an even narrower segment of the DJIA, we find that an index of 10 stocks is the weaker of both the index of 5000 and the index of 30. When I see indexes of lesser stocks being weaker than indexes of more stocks, I have to argue that the facts are not supportive of effective manipulation. No, contrary to popular belief and conventional thinking, this is yet another form of non-confirmation.
Again, I'm not saying there aren't manipulative efforts to hold the markets up, but I am saying any such efforts are not appearing to be very effective. Also, the more manipulative efforts there are applied to the market, the worse the outcome will ultimately be in the end.
My analysis of the market is based on statistical analysis of market trends and traditional Dow theory. Cycles News & Views is not your average 4 or 5 page newsletter. Cycles News & Views provides very detailed market analysis, time and price targets and both short and intermediate term market turns based on the proprietary Cycle Turn Indicator. For more information, please visit www.cyclesman.com
Tim W. Wood
© 2005 Tim Wood