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THE DOW REPORT
The Good News and the Bad

The good news continues to be that the Industrials remain in gear with the Transports on a Secondary level. This occurred earlier this month when the Industrials bettered their March 2005 Secondary high point, as is represented by the blue trend lines on the chart below. It is bad news that the Industrials are currently negative for the month in relation to the January Barometer. It is bad that the Industrials have failed to hold above their breakout point, which again is represented by the blue trend line in the lower window of the chart below. Violation of the short term lows made in December will be bad. According to Dow theory the secondary trend remains bullish, which obviously is good news for the market. From a cyclical perspective, this is now changing.

Now I want to take a closer look at the Transports. In the chart below we have the Dow Jones Transportation Average in the upper window and the Dow Jones Air Freight Index in the lower window. The Air Freight Index did not confirm the December highs made by the Transports as is represented by the red trend line. Since this non-confirmation, the Air Freight Index marginally broke below the December lows and is currently on the rebound. The non-confirmation, as is noted in red, is bad news and the break below the blue line is telling us that there is weakness beginning to appear within the transportation sector and specifically with Air Freight. Unless/until this non-confirmation is corrected, this too is a red flag for the Transports.

Next we have the Dow Jones Transportation Average in the upper window below and the Dow Jones Marine Transport Index in the lower window. Here we find that the Marine Index has lagged the Transportation Average badly as the Marine Index topped out in February 2005, while the Transports moved higher into December. This non-confirmation is noted by the green trend line. Also, on a shorter-term basis, the advance into the late December high by the Transports was not confirmed by the Marine Index. This shorter-term non-confirmation is marked in red and since that non-confirmation, the Marine Index has broken below the corresponding December low made by the Transports and well below its December lows. Therefore, the message that this chart is sending is also a red flag for the Transports with major weakness occurring in the Marine Index.

Below is the Dow Jones Transportation Average in the upper window and the Dow Jones Trucking Index in the lower window. Here, we find that the Trucking Index also failed to confirm the late December high seen by the Transports, but has thus far managed to hold above their December lows. I would have to give this one a yellow flag.

Next, we have the Dow Jones Transportation Average verses the Dow Jones Railroad Index. The Rails are the strongest of these Transportation sectors and is in lock step with the overall Dow Jones Transportation Index.

Now for a follow up on the Industrials verses the Retailers. With the Retailers still badly lagging the Industrials, these non-confirmations are definitely bad news for the market. You can see clearly that non-confirmations between these averages is bad as is evident in that every non-confirmation shown on this chart has ultimately resulted negatively. Yes, perhaps this time is different, but I’m not inclined to bet against the odds. Should the Retailers correct this non-confirmation and get in gear with the Industrials, then yes, this would be very good news. But, until then, this too remains a red flag.

The bottom line is that the Secondary Trend does in fact remain bullish. But, the erosion that is beginning to appear in the different Transportation sectors is not good news for the overall Transportation average or the Industrials. Add to that the fact that we have the Retailers also warning, intermediate term cycle tops coming due, a 4-year cycle top due and the Primary Dow theory non-confirmation still at large, all may be bullish on a Secondary level, but the underlying technical picture isn’t quite so rosy.

The January issue of Cycles News & Views is now available. In this issue I give very specific market expectations as they relate to the current technical set up. These expectations are based on over 100 years of market history and trend quantifications. These quantifications give us a 91.5% probability of the expected outcome for the market over the next several months. A subscription to Cycles News & Views also comes with access to the subscriber-only web page, the Cycle Turn Indicator as is used for identifying short and intermediate-term market turns and intra-week postings that are done three times a week. For more information, please visit www.cyclesman.com

Tim W. Wood

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