Dow Theory Non-Confirmation

[HenryTo]

Another day, another non-confirmation as the Dow Industrials popped up 73.23 points while the Dow Transports actually declined 3.02 points. One of the leading indicators within the Dow Transportation Index, the XAL Airlines Index, actually topped out in late January and has declined over 20% since then.

It is time for the bulls to sit up and take notice.

Best regards,

Henry

[HenryTo]

Hi Reid,

Thanks for the comments. I also agree that we are closer to the end than the beginning. However, I don't think all of us are bullish - well some are definitely much more bullish than the public but there are others - such as rffrydr - that are somewhat bearish and also raise very good points at the same time.

For me, the divergences are now starting to become a concern, although they are still somewhat muted, given that:

1) I had been expecting large gap outperformance for a long time, so a month or so of divergences (where the DJIA and the S&P 500 out performs everything else by a significant margin) is not too much of a concern to me. Of course, this doesn't mean that I cannot try to do so some "tactical" adjustment and trim down our 100% long position in our DJIA Timing System

2) Valuations are not too stretched - either from a P/E or a Fed model standpoint. One may say there is not too much of a difference between a P/E of 18 or 20, but to me, that is more another 160 point runup in the S&P or a further 1,500 point runup in the DJIA.

3) There is still a lot of potential buying power on the side. The best evidence is the huge chunk of change sitting in the balance sheets of private equity firms. ISI just completed a study and argued that there is sufficient buying power for private equity investors to take over 50% of the S&P 500 corporations. Because of this private equity "threat," many corporations are now also hurriedly buying back their own stock (not that they were not doing this before) - as exemplfied by the $15 billion promised buyback of IBM.

Once investors catch on to point number 3), then it will be time to start selling - but for now, until the Barnes Index rises to over 70, I think I will stand pat for now.

Best regards,

Henry

[reidbrownfield]

Henry,

On April 20th, I posted a new topic about a blow off top. Everyone here at the forum expects this bull rally to last forever. Most people that believe we are in a secular bear, cyclicial bull are afraid to show themselves. The top is much closer than most believe. I am not a bear in any big way. I only have one sector short. However, I can see this run is clearly in the final stages.

Reid