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THE DOW REPORT
A Quick Look at Key Sectors

Last week we found that the Housing Index is beginning to soften, but that it is still holding above key support levels. We also found that the Home Furnishings sector has broken down and seems to be leading the housing sector and perhaps is even reflective of other areas of consumer spending. This week we want to look at a few other key sectors in an effort to determine which other areas may also be softening.

To begin with we have the Dow Jones Auto Manufactures Index in the chart below. Beginning at the March 2003 intermediate-term low this index began moving up in conjunction with the rest of the market as price advanced out of the bear market Phase I low. As a general rule, there is an intermediate-term cycle or rhythm in the market that averages approximately one year. In this case, you can see that this index pushed up into a top in January 2004 and then bottomed 1 year later in March 2004. At this point, all was well. But, when the next intermediate-term advance failed to move above the previous intermediate-term high, trouble began. From a cyclical perspective, this setup is what’s known as a failure and when failures occur after such an advance, the expectation is for the previous low of the same degree to be violated. You can see that this is exactly what happened as price fell into the April 2005 intermediate-term low.

Now there is even more trouble brewing as we have a second failure in place. With the rally out of the April 2005 intermediate-term low failing to push above the 2004 high, prior to a break below the April 2005 low, we now have a second confirmed intermediate-term failure. Let me say this another way. The fact that the April 2005 low has been violated serves to confirm that the advance out of the April low was a failure and our general expectation is that we should look for this index to work lower into or around April 2006 as the next intermediate-term cycle bottoms.

Next we have the Housing Index. Here we see that since the Phase I low in March 2003 each of the intermediate-term lows has made progressively higher highs. Therefore, from an intermediate-term structural point of view this index remains bullish. Shorter-term, this index has undergone structural deterioration with a series of lower lows and lower highs, as are marked by the green and blue support and resistance levels on the chart below. The question now becomes, will this shorter-term deterioration pull this index down below the previous intermediate-term low as marked in red? Based on what we saw last week in the Home Furnishing Index, the answer is most likely, Yes. Therefore, the April 2005 low is the key level to watch on the Housing Index. If this level is violated, it should serve to confirm a downturn for housing.

In the next chart below we have the Dow Jones Financial Index. Here the Phase I low came in October 2002. Therefore, having bottomed in October 2002 rather than March 2003, the first intermediate-term advance ran a bit longer than the norm. Nevertheless, the 2004 low occurred in close proximity to the timing of the other lows bottoming in May 2004 on this index. The intermediate-term advance that followed was structurally sound in that it exceeded the previous high and bottomed above the previous low. This index last bottomed in April 2005 and at this point the cyclical structure of the intermediate-term cycle remains positive. The important level to watch here is also the April 2005 low.

Next is the Retail Holders Index. Here too we have progressively higher intermediate-term highs and lows since the March 2003 Phase I low. The fact that the 2004 intermediate-term cycle top has been bettered is positive. On a shorter-term basis this index has undergone some structural deterioration since the July high. We are now moving into the Christmas season and the retailers should therefore do well for at least the remainder of this year. The thing that will be very interesting to watch is the performance of this index during the shopping season. Last year this index topped in mid-November. If this index can’t better its July highs, then it will indeed be telegraphing a slow down and a challenge of the April 2005 lows will definitely be in the cards. Holding above the April 2005 low means that the intermediate-term cyclical picture remains bullish and intact. Violation of the April 2005 intermediate-term low would signal a major trend change and a slowing in consumer spending.

Tim W. Wood

In the October issue of Cycles News & Views I give specific timing windows for price, price targets, trend expectations, and more. In the November issue came out last week and I discuss the meaning of the current stock market and dollar advance as well as the recent weakness in gold. A subscription to Cycles News & View also includes web-based updates 3 nights a week. Given the current state of the markets, you should have the technical data provided in these issues. For more information please visit www.cyclesman.com.

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