Review
· On August2, 2011, Dow Theory indicated that the market was headed lower. At that time we posted an article to indicatethat the bull market run from March 9, 2009 was over.
· OnAugust 8, 2011, all indications were that the stock market had reached a pointwhere we could estimate the upside targets or bear market rally targets. On August9, 2011, we said the bottom had been established and that the direction washigher. We missed the actual marketbottom by 1.42%. We also indicated thata renewed bull market could not be considered until the old highs, set in 2011,were exceeded.
· On October15, 2011, we said that “…the indexeswill at least rise to the July highs [DJI-12,724/DJT-5,618] and maybe even the April 2011 highs [DJI-12,807/DJT-5,527].” With this in mind we said, “The coming market volatility will providegreat opportunities for traders and allow investors a chance to cash out ofotherwise undesirable positions and take profits.”
Dow Theory: February1, 2012
Today’smarket activity has the Dow Jones Industrial Average trading as high as 12,784.62and the Dow Jones Transportation Average trading as high as 5,374.81. While the Dow Industrials are knocking on thedoor of the July 2011 high of 12,807, the Dow Transports appear to be far fromconfirming the generally bullish market direction. However, keep in mind that the Transportstypically jump by a greater percentage day-to-day than the Industrials so itwould not be unexpected to see the Transports potentially give a bullishconfirmation from its current level.
Leavingaside the prospect that the Industrials and Transports may give a Dow Theorybull market signal, we’re still in a bear market. Also, we have our reservations about arenewed bull market indication, when and if it comes. After all, the Transportation Index havetypically led the way in terms of where the general market is headed.
Throughoutthe bull market run from March 9, 2009 until August 2, 2011, the TransportationAverage continually led the market higher and refused to confirm on thedownside. Now that we’re currently in abear market, our view is best represented in the quote from our April6, 2011 comment, “what we see fromthe Transports on the way up we may also see on the way down.”
Combinedwith the fact that we are already in a bear market and potentially faced withthe downside pressure of the second half of a 4-year cycle as indicated in our January10, 2012 posting and you’ve got the recipe for a classic Dow Theorynon-confirmation of a bull market.
ThePunchline: Be on the lookout for the Dow Industrials (12,807.51) and DowTransports (5,618.25) to jointly exceed their 2011 highs. If either index cannot go above theirrespective 2011 high, then we have to assume that the bear market still rules. If a bear market rules, from such aprecarious height, then it would be worth re-considering any new investments atthis time.