For someone who uses Dow Theory every single day, it’s not something that I write about much. I may indirectly reference certain tenets all the time, but rarely do I write specifically about the 130 year old Dow Theory. I think I pretty much laid it all out earlier this year in my post: 5 Things Every Investor Should Know About Dow Theory. The simple minded choose to stick to the Dow Jones Transportation Average and Dow Jones Industrial Average either confirming each other or diverging from one another. And while this may in fact be a one of Charles Dow’s tenets (although they were Railroads back then, not the Transports we have today), it does not even make it into my top 5 most important tenets. [Read more…]
One of the recent developments that we’ve been noticing is the outperformance out of the Dow Jones Transportation Average over the past week or so. We’ve been hearing all year about the Dow Transports struggling compared to some of the other major stock market averages. At the beginning of the month, the Dow Jones Industrial Average was up over 2.5% while the Transports were negative Year-to-date. Where markets close at the end of the year is a number completely arbitrary, so discussing year-to-date returns is one of the more useless exercises performed by market participants and market watchers. But regardless, the headlines were mostly about the Transports underperforming. Not only has this flipped over the past week or so, but bigger picture all the Transports do is outperform. Since 2012, it’s not the DJ Industrials that are leading, it’s the DJ Transports.
Since the Fall of 2012, the Dow Jones Transportation Average has more than doubled the performance of its Industrial counterpart. Here is a comparison chart showing the Transports up over 80% during that time while the Industrials couldn’t return half that:
More importantly, in my opinion, the ratio between the two has been trending beautifully within a very well-defined uptrend channel. The year-to-date headlines don’t tell the whole story. It’s not sexy. But all we’ve seen this year is a tiny correction in the ratio towards the lower of the two parallel trendlines. A buying opportunity is what it looks like from here:
So don’t worry so much about arbitrary year-to-date numbers. They really mean absolutely nothing when it comes to supply and demand dynamics. I think this outperformance out of the Transports should continue. I don’t like to fight the primary trend, that’s Dow Theory. Charlie Dow knew what he was talking about 120 years ago. Who are we to dismiss him?
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Tags: $DJIA $INDU $DIA $YM_F $TRAN $IYT $DJT $DJI
Coming into 2015, the major US Stock Market Indexes like the Dow Industrial Average and S&P500 were not areas where we wanted to be putting new money to work. Not only did we have failed breakouts around the holidays which is always a bad sign, but I felt we needed some consolidation, or digestion, of the gains over the past few years. Markets can consolidate gains in one of two ways, either with a downside correction in price or sideways through time. The latter is obviously the healthier version of the two.
Today I want to take a look at a few of the Major US Stock Market Indexes to show how these averages have been consolidating over the past several months. The first one is the S&P500 representing 500 of the largest corporations in America. Look at price trading within these two converging trendlines and essentially at the same price that it was in early November:
The next chart is the Dow Jones Industrial Average which includes 30 humongous US Stocks. Notice how similar this pattern is to the S&P500. Prices are right where they were in early November and trading within this symmetrical triangle looking formation defined by two converging trendlines:
The Nasdaq100 is more of a tech heavy index containing 100 of the largest companies that trade on the Nasdaq. In this case, we don’t have a symmetrical triangle, but more of a sideways range. Notice once again how prices are right where they were in early November:
And finally here is the Dow Jones Transportation Average. This index contains 20 big market-cap stocks related to transportation including airlines, railroads, shipping companies, etc. One more time we can see prices near where they were in early November and trading within a 3 month range defined by two somewhat parallel trendlines:
I think the main takeaway here from these 4 large-cap Indexes is that we are stuck in a range. Although it might seem frustrating to some short-term traders, this is not necessarily a bad thing bigger picture. Now what we want to see are breakouts above the upper trendlines in each of these charts. Until then, I don’t see any reason to be involved in the major averages.
To me, it’s important to look at each of the averages and compare them to one another. Are they telling different stories? Or are they telling us the same thing? There is no Holy Grail when it comes to the market. It’s more of a weight-of-the-evidence kind of thing. And right now, the weight-of-the-evidence suggests that tactically there are better places to be that in the major US Stock Market Indexes. Until we break above the upper end of those ranges, I would expect more choppiness. Who needs that?
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Tags: $DJIA $DIA $SPY $SPX $ES_F $YM_F $NDX $QQQ $NQ_F $TRAN $DJT $DJI $IYT
One of the more interesting developments since March began has been the severe underperformance out of the small-cap stocks. Coming into the week, the Russell2000 was actually in negative territory year-to-date. This compares to the large-cap S&P500 which is up 7% for 2014 and Dow Industrials up over 3%. This is a big difference. But the problem is what’s happening behind the scenes to this former leadership group.
Here is a chart of the Russell2000 relative to the Dow Jones Industrial Average. After really leading the way off the 2008/2009 bottom in US Equities, this ratio has potentially put in a deadly failed breakout:
I recall earlier in the year, this “breakout” was getting a lot of attention, especially from the bulls. But in recent months, these guys have been crushed on a relative basis. Since the March 3rd closing highs, the Russell2000 is down 5% with the Dow Jones Industrial Average up over 5% during the same period.
Look at the 2006 and 2011 highs in the ratio serving as important resistance. It looks to me like the ratio is failing hard to stay above those highs. As we know, from false moves come fast ones in the opposite direction. So unless this ratio can get back above 69, the benefit of the doubt has to go to the bears on this one.
As far as market implications go, we want to see leadership out of the small-caps for evidence of risk appetite. We’re seeing some other divergences in the Bond market warning of the same thing. Seasonal studies suggest a week period for Stocks with higher volatility (see here). So this shouldn’t really come as much of a surprise.
I think a more neutral stance in stocks as an asset is likely to be the better position for the rest of the summer. We have some strategies in order to execute that (see here). So I’m going to continue to be cautious with small-caps, particularly on a relative basis. And this recent development to me is just another feather in the hat for the bears, at least for now.
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Tags: $IWM $RUT $DJIA $DJI $INDU $DIA $YM_F $SPY
As we finish up the first quarter, let’s take a look at all of the major US Stock Market Averages. Some of them are showing more strength than others, but similar support and resistance levels can be seen across the board. I came into the year bearish about the US Stock Market, and that has worked well so far with all of them up or down 1% YTD. But as always, I’m trying my best to keep an open mind. You have to.
The first chart is the S&P500. We’ll use ETFs to keep things simple. Here is $SPY managing to stay above all of that January resistance. The bulls are still in control and there is nothing wrong with this chart until those levels are broken. Just below this critical 184-185 level is a 50 day moving average was well. One warning sign is the bearish momentum divergence at the recent highs. But price pays, so until this shaded area is broken, there is little to be overly concerned about.
Notice the difference between the S&P500 and Nasdaq100. In the $QQQ chart below, the Nasdaq100 is already below the January resistance. The exact same shaded area seen up above in the S&P500 is drawn in the Nasdaq100. The bearish divergence in momentum is actually even worse than in the S&P500. This is why we put out a sell short Nasdaq call a week ago as long as prices are below 89.
The Dow Jones Industrial Average is a bit of a difference story. The first thing that stands out is its inability to make a new high in March. While its counterparts were able to exceed their previous peaks, the Dow Industrials are still battling. This divergence has the Dow Theorists nervous (see here). Once again, it’s the shaded area that we’re watching here to signal more trouble ahead.
The next chart represents the Small-cap Russell 2000. This is another one that was able to make a new high into March and then failed quickly back below the January highs. We can put small-caps in the same category as the Nasdaq100. Bearish below the shaded line and more neutral/bullish above it.
The Mid-caps look a lot like the S&P500. Here is the $MDY representing the Midcap400. Like the S&P500, Mid-caps made new highs into March and have so far retested their January highs and former resistance levels successfully. As long as last week’s lows hold, which represent the January highs and 50-day moving average, then the bulls are fine. Below that and things get hairy.
There are a lot of if/then statements here, and that’s for a good reason. I’m not certain of anything and if someone tells you they are, you should run. I look at all of my charts with a very open mind. I always try to assume I’ll be wrong and try to find a level that would signal that to me. Sometimes those levels are less clear and in those cases I try to stay away. Up here we can easily see which indexes are stronger and which ones are weaker so far in 2014. Comparing the averages tells us a lot, especially when these January/March levels have been so universally relevant.
These are the levels we’re watching. I think they’re the most important right now. If/when that changes, we’ll readjust our strategy.
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Tags: $DJIA $DIA $DJI $QQQ $NDX $IWM $RUT $MDY $SPY $SPX $ES_F
A funny thing happened in the US Stock Market last week that think is worth noting. I came into the year bearish US Stocks and felt that Treasury Bonds and Commodities were the better place to be. So far that has worked really well, but I think this is just the beginning and we’ll see a lot more of this going forward.
The first thing that I believe is worth mentioning is the horrible breadth in the market. It’s like onions and garlic and all sorts of nastiness. On Thursday 2/27 the S&P500 closed at a new record high, the highest level of all time. Now, remember this is just the index itself. How many companies actually participated in that and made new highs themselves? 6%
Only 6% of the 500 stocks in the S&P500 managed to close at a new 52-week high on a day where the headlines simply read, “S&P500 Closes at a New Record”. What the headline writers don’t want to tell you is that no one participated in that rally. Only a few names made new highs themselves. But that doesn’t sell. That doesn’t draw clicks. It’s not sexy. Fortunately for us, we don’t care about sexy. We’re not here to sell commercials or banner ads. We’re here to make money.
Bespoke did a nice job of breaking down the (lack of) new highs Thursday sector by sector:
Well I see major topping candles all over the place, especially in the momentum names. Key reversal days and reversal weeks all over that present excellent risk/reward opportunities where one can get short with a tight stop above last week’s highs. I’m not going to go over a list of these names, but you can do the homework and there are plenty out there you can find easily. FINVIZ has some good tools for this.
I suggested on Friday afternoon that short-sellers got a nice entry point. So far this is working well:
— J.C. Parets (@allstarcharts) Feb. 28 at 03:01 PM
Here is what I’m seeing right now in some of the major averages. We typically find candlesticks like these at tops. Some call them mouse tails, long wicks (they are candles after all) and long shadows (is what the Japanese call them). Either way, the consequences aren’t good. It tells us that the bulls, who were in control, could no longer support the price up there, hence the reversal. Here are two examples, S&P500 & Midcap400, but you can find many more out there in the individual stocks and sectors:
So far this year Treasury bonds are up almost 7%, Commodities (equal-weighted) are up 8%, and the Dow Jones Industrial Average is actually down 2% (coming into the new week). So when I hear how great this stock market is and how easy it is to make money, I have to chuckle. There are barely any names participating and the averages are down after 2 months of trading and underperforming other asset classes by a lot.
Shorts don’t just have to be focused on calling tops in the momo names either. There are plenty of underperformers out there that have not been participating for a while. If they’ve already been weak, in all likelihood those names/sectors will continue to underperform and likely to get hit harder than the rest. An interesting sector to note is Financials. These guys haven’t been doing a damn thing. While S&Ps race to all-time highs, Financials on a relative basis peaked last July. LAST JULY. So when the S&P500 closed at a new all-time high Thursday and not a single stock in the financial sector made a new high, I can’t say I’m surprised one bit. I would expect more underperformance here.
If stocks take out last week’s highs and continue to rock, you want to see participation expanding also. If this doesn’t occur, I think you just saw your short-term top. I still have the same mentality that I came in with to start the year. Sell stocks, do not initiate up here, buy bonds and buy commodities. Nothing I’ve seen so far tells me to change this thesis.
Note: If you’re going to be long US stocks I think the best bet is to stick with low correlated names. Run the math before you enter new positions. I think there’s a bunch of good ones out there. It’s the asset as a group that I don’t like. If you follow me on Stocktwits or Twitter @allstarcharts I’ve mentioned a bunch of these low correlation names lately.
Tags: $XLF $KRE $IAI $SPY $DJIA $DJI
The worst performing month of 2013 is now in the books. Funny enough, the S&P500 only lost 3%. But the internals and breadth in this market have been deteriorating for some time. We’ve pointed to several examples of this over the past 4-5 weeks, so today we reviewed some of that. Also bonds this week confirmed everything we discussed in last week’s video. They look great and everyone still hates them. And finally since it’s the end of the month, we took a look at the Dow Jones Industrial Average going back 20 years. And it looks like we’re up in the nosebleed section.
I hope you enjoy the video:
Tags: $DJI $DJIA $DIA $SPX $SPY $ES_F $TLT $TNX $ZB_F $CRB $DJP
I think it’s important every now and then to take a step back and really compare today’s market environment to similar circumstances throughout history. It helps to gain some perspective on where we are and where we’ve been. And maybe, some of that information can shed some light on where we’re going.
Today’s Chart of the Day plots every Dow rally in terms of both magnitude and duration. Rallies in the Dow Jones Industrial Average, according to this chart, represent any advance that came after a 30% decline. There have been 13 such instances since 1900, which on average is one every 8.5 years or so.
Here is the chart showing how our current stock market rally (off the March 2009 lows) is below average in both magnitude and duration:
The good folks at Chart of the Day also note that when you compare the current advance to the most recent post-major bear market rally (i.e. the rally that began in 2002), this bull market is significantly greater in magnitude but also accomplished this feat in less time. I thought that was interesting. But if you go back further in history, this “huge rally” is really nothing special. At least not yet…
Tags: $DJIA $DIA $YM_F $DJI
In bull markets, you want to see both the Dow Jones Industrial Average and the Dow Jones Transportation Average making new highs together. Dow Theory suggests that when one of these gets left behind and doesn’t confirm the other, something is wrong and there should be cause for concern.
Last week the Dow Industrials closed at new all-time highs, and now sit above their May closing highs. Meanwhile, the Transports are still almost 2% from their May highs. So if you believe in Dow Theory, you want to see these transporation stocks get going quickly.
My friend Jonathan Krinsky, CMT over at Miller Tabak has a note out this morning discussing the current divergence:
“The Transports, however, should certainly be given some attention this week. The TRAN index made its all-time closing high on May 17th. Prior to last week, the DJIA all-time closing high was May 28th. So there was already a slight “non-confirmation”, but from our perspective, the time between the two highs was not sufficient to classify as a true “Dow Theory non-confirmation”.
The current divergence, on the other hand, would be nearly two months in the making (chart below). Of course, this could easily resolve itself with a rebound in key transport stocks such as United Parcel Service (UPS) and FedEx (FDX). The index is less than 2% away from those May closing highs. Until then, however, this is a small divergence that Bulls would certainly like to resolve sooner, rather than later.
Bottom Line: It is hard to ignore the strength that was seen last week. Much like “The Running in Pamplona”, Bulls pretty much did everything they wanted, with an unrelenting climb. With most momentum indicators running in overbought territory, the NDX coming off 13 consecutive up days, and a potential “Dow Theory Non-Confirmation”, however, we are still hesitant to chase stocks without at least a few days of consolidation.
That does not mean that stocks are huge short-sales, however. There is very little evidence of a broad based decline, at least yet. Our point is that sometimes holding-off on aggressively buying, and waiting for better opportunities is the correct strategy.”
I think something else worth noting is the NYSE Composite. Because of all the ADRs and REITs in that average, it’s by far the worst of the US Stock Market gauges. We’re paying attention to that.
Tags: $DJT $DJI $DJIA $IYT
It’s not just about the Dow and the S&P500 ladies and gentlemen. Let’s not ignore the legend that is the S&P MidCap 400 Index. Until just a few weeks ago, MidCaps were the best performers year-to-date of all of the major US averages. Through most of May, the MidCap 400 was still outperforming the Dow Jones Industrial Average, Nasdaq100, S&P Small-Cap 600 and the Russell2000. But now we’ve arrived at some critical levels.
We’ll use the $MDY – SPDR MidCap 400 ETF just to keep things simple. Here’s what I see: all throughout April and early May this 209-210 level was major resistance. We saw various tests which showed us huge evidence of overhead supply. Once that supply dried up, midcaps rallied a cool 6% in 3 weeks. That’s a big move:
Now, all in theory of course, former resistance should become support on the way down. Last week, this polarity proved itself to be valid as the buyers showed up nicely. But this week, we’re down here again. Will the buyers show up once more?
Here’s the problematic development that I see. When midcaps broke out to make new highs last month, the relative strength index never confirmed. We saw lower highs in RSI without any overbought conditions as prices went on to make new highs. We don’t like that very much.
So I would say that any break below those key lows and it would probably make sense to short against it. But for now, as long as prices remain above those 209-210, we need to give the bulls the benefit of the doubt. This looks like a big battle ground area from where I’m sitting. Take a look at the $MID Index itself and you’ll see the same thing.
The resolution here should be an important one. Stay tuned…
Tags: $MDY $MID $SPY $DJIA $DJI $IWM $SML $QQQ
We’ve all heard it before. It gets talked about every year right around this time. But what does it mean exactly? Where does this saying come from?
Well, legend has it that it derived from the British. The original phrase goes, “Sell in May and go away. Stay away till St. Leger’s Day”. So basically, in a similar way that market moving new york fund managers go out to the Hamptons for the summer, slowing down the stock buying, out in England they don’t get back to business until Horse Racing season is over in the Fall. The last leg of the English Triple Crown, the St. Leger Stakes, is a huge celebration that goes back to the late 1700s. We Americans like to call that Football Season.
So the annual cycle is very simple: you buy stocks in November and sell them at the end of April. “The worst six months”, as my friend Jeff Hirsch likes to put it, begins next week (See my Dow Chart here). The numbers historically are incredible. Let’s say you had invested $10,000 in the Dow Jones Industrial Average in November of 1950, sold it all at the end of April 1951, and did that every year since, you would have made $674,073 by 2011. Now, had you done the opposite with that $10,000 and bought in May and sold on Halloween every year since 1950, you would have somehow lost $1,024 during that same time. So in other words, every single dollar made during that 60+ year period in the Dow was made during “The Best six months” of the year. That is just unbelievable to me. I’ve been aware of these stats for many years and it still impresses me every time I read it or say it out loud.
Now, as we all know and has been well documented, post-election years are typically some of the worst of the four-year Presidential cycle. And as it turns out, the best/worst six month trading strategy gets affected as well. From the Stock Trader’s Almanac:
“Post-presidential-election years, such as this year, have the worst performance record out of the cycle. Since 1833, post-election years on average have gained just 2.0% (up 20, down 24). In comparison, top performing pre-election years have gained 10.4% on average (up 34, down 11). As May nears, the following historical look at how DJIA has performed during the Worst Six Months of post-election years since 1905 should prove useful while trying to decide whether or not to “Sell in May” this year”
“Two sets of averages are presented. The first is the DJIA’s includes all data since 1905 while the second starts at 1953. Prior to 1950 the U.S. economy (and the global economy) was substantially different than now. From 1901 to 1951 farming made August the best performing month of the year. This is no longer the case and August is now the second worst month of the year.
Largely due to the fact that post-election years generally perform poorly, there is little difference in the overall outcome whether or not years before 1953 are included or not. The ratio of advancing/declining “Worst Six Months” is nearly the same around 2:1, although the average gain during the “Worst Six Months” since 1953 is significantly smaller, virtually flat. Also of note is there has been just one double digit gain (2009) during the “Worst” months of post-election years since 1953. While there have been four (five if rounded) double-digit declines. DJIA’s performance from 1985 to 1997 is also impressive, but those results are from the last secular bull market that lasted from 1982-2000, not the secular bear of the last decade-plus.”
So what have we learned? Number 1: “the worst six months of the year” really are the worst. And number 2: in post-election years, they’re somehow even more vulnerable to correct. So let’s keep these stats in mind as we make all-time highs in some of the major US averages.
We’ll continue to let price dictate our actions, that will never change. But I think it’s prudent, as always, to be aware of the seasonality in the stock market. Nothing wrong with that. In fact, to ignore it I think would be irresponsible of us.
Tags: $DJIA $DIA $DJI
So here is a quick snapshot of the Dow Jones Industrial Average and its broadening top formation. This one has been forming since the end of January and I think it’s pretty clear. Consider this one another feather in the hat for the bears.
This particular type of formation is fascinating to me because it frustrates everyone. Here’s the psychology behind it: Take the lows from back in early February and you have the bulls saying, “okay, we’re long and strong, unless we take out last week’s lows. If we roll over, we’ll get out”. Then the lows get taken out just before reversing higher to make fresh highs. Those disciplined longs are now out of this market and watching it rip without them.
Then towards the top of the range, you have the bears saying, “okay, we’re short right here and we’ll cover if we make new highs”. Then, of course, the market makes new highs, taking out the stops and then reverses lower to make fresh lows. The bears are now watching the market get crushed without them.
At this point, the bulls are frustrated. The bears are frustrated. And everyone who did nothing is still a genius. Then the same thing happens again with the longs against the new pivot lows. And the same thing happens again with the shorts against recent pivot highs.
It’s a ridiculous cycle that is definitely amusing to watch. But at the end of the day, the increase in volatility is a sign of a turning point. And therefore, since we’ve rallied into this particular broadening formation, a reversal here would signal lower prices for the Dow Industrials.
I’d say a breakdown below last week’s lows would confirm, but then I would just be another silly trader that we just had some fun with up above.
*One more thing to note is the bearish divergence in RSI down at the bottom of the chart. Fresh highs Monday morning for the Dow Jones Industrial Average (imagine that), but lower highs clearly in the Relative Strength Index.
Careful out there…
Tags: $DJI $DJIA $DIA