Dow Theory Update

On May 19, 2012, we said that the bear market rally had ended (found here).  In our view, we believed that the Dow Jones Jones Industrial Average would not exceed the high of 13,279.32 set on May 1, 2012.  The most recent run of the Dow Industrials is causing us to wonder if our assessment was correct.

Despite our concern that the Dow Industrials will increase above 13,279.32, we do need to point out  two technical non-confirmations of the market that have been established so far.  First is the secular (long-term) level of the market.  Ordinarily, the secular (long-term) trend of the market would be bullish when and if both the Industrials and Transports rise above their respective 2007 to 2012 peaks.

As can be seen in the chart below, the horizontal black lines shows that the Transportation Index managed to rise above the prior high of 2007/2008.  At the same time, the Dow Jones Industrial Average did not come as close to the prior highs.  This lack of confirmation suggests that we are still in a secular (long-term) bear market.

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At the same time, on a cyclical basis (short-term), as indicated by the green lines above, the Dow Jones Industrial Average and Transportation Average have gone their separate ways.  The Dow Jones Industrial Average trending higher while the Dow Jones Transportation Average has trended lower.

So far, all indications are that we’re in a cyclical and secular bear market.  Since our bear market indication of August 2, 2011 (found here), we have not received any indication to the contrary.  However, if we’re completely wrong about the bearish direction of the market, a Dow Theory bull market indication on a cyclical basis (short-term) would occur if the Dow Industrials and Transports were to increase above 13,279.32 and 5,627.85, respectively.  Additionally, a bull market indication on a secular basis (long-term) would occur when the Dow Industrials and Transports exceed their respective highs in the period from 2007 to 2012.

Despite our concern for the bear market that we are in, we continue to pursue the policy of accumulating stocks that appear reasonably undervalued which is in accordance with Charles H. Dow’s emphasis on values at a reasonable prices. Our most recent purchases of Carbo Ceramics (CRR) and Expeditors International of Washington (EXPD) brings our partnership portfolio to 57.78% in stocks and 42.22% in cash.

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