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THE DOW REPORT
Overview and a Look at the Transports

The good news for the market is that as a result of the January 6, 2006 bullish reconfirmation of the Secondary Trend, the market has held firm. This fits with our “First the Gain, Then the Pain” outlook for 2006, which was discussed earlier this year, and specific details of this outlook have been covered and continue to be monitored in my newsletter. 

The bad news for the market continues to be the poor internals. These deteriorating conditions are a sign of things to come, a change that is somewhere over the horizon. In other words, price is what matters at the end of the day, and for now all is well on that front and these poor internals are viewed as not really mattering. In the shorter-term, that may be true. But, when these internals are setting the stage for the next act and when they begin to matter, it is likely they are going to matter a lot. In the meantime, all appears well, at least thus far. The Secondary Trend remains bullish, and my position of “First the Gain, Then the Pain," remains on track. But, as our old buddy Kennedy Gammage used to say, I would “Dance Close to the Door.”

Last week we looked at the Industrials verses the Transports and the more recent reconfirmation of the Secondary Trend. We also looked at other important non-confirmations and the poor internals on the Nasdaq. This week, I want to look at the Transports.

Below is a chart of the Dow Jones Transportation Average verses the Dow Jones Trucking Index. You can see that here, too, the Trucking Index recently bettered its previous Secondary high point as well. Therefore, this sub-sector within the Transports is in gear with the entire Transportation sector. The negative here is that the Truckers have now fallen back below their recent breakout and support level.

Next, is a chart of the Dow Jones Transportation Average verses the Dow Jones Rail Road Index. This index remains in gear with the Transports and as of this writing, is still holding above its breakout level.

Next, we have the Dow Jones Transportation Average verses the Dow Jones Air Freight Index. The Air Freight index is the strongest in that it is further above its breakout and support level.

The first, and thus far minor, concern is now appearing with the Dow Jones Trucking Index falling back below support levels. If the other indexes can hold and if the Truckers can resume their advance, then this weakness is no big deal. But, should the other indexes fall below their breakout points, then something else may be in the wind. A drop below previous Secondary low points would definitely be a clue that a change in trend has occurred. Until such time, the Industrials are in gear with the Transports, which are in gear with the Rails and the Air Freight sectors. The Truckers are beginning to slip a little.

Below, we have a chart of the Dow Jones Transportation Average verses the Dow Jones Marine Transportation Index. This is one sub-sector of the parent index that continues to lag. On the bullish side of the coin, the Marine Index needs to at least better its December 1st Secondary high. Should this occur from this level it would establish a higher low as well as a move above the previous Secondary high point, which would in turn set this index up to get back in the game. On the bearish side of the coin, failure to better the December 1st high should be met by more weakness. In the meantime, if this index can just manage to hold above its previous Secondary low, then it does still have a chance at getting back in gear with the other Transportation sectors.

The bottom line is that in the wake of the January 6th Secondary reconfirmation, price continues to hold. But, the fly in the ointment continues to be the poor and deteriorating internals. Healthy breakouts come in the wake of accumulation periods and occur with expanding internals. What we have seen is just the opposite. To illustrate this point, note on the chart below how each rally during 2004 and 2005 occurred on poorer and poorer breadth. If that was a real “accumulation period” we would have seen expanding breadth rather than contracting breadth. Now look at the breadth in relation to this “break out.” It’s actually falling from yet another lower peak by this breadth indicator.

Bull market breakout? No, just as the reconfirmation of the Secondary Trend suggests, this is a continuation of the rally separating Phase I form Phase II of the Dow theory secular bear market that began in 2000. This advance has been unprecedented given the technical backdrop in which it has occurred. No doubt about that! But, one thing that hasn’t changed is the meaning and end result of this data. It takes buying for an advance to continue and the buying is shrinking as can be seen by this breadth indicator. Furthermore, no amount of liquidity can fix the shrinking breadth data, and this should be obvious as we all know that the liquidity pump has been in high gear, yet breadth has been contracting for over 2 years. Yes, this entire 2004 to present act of levitation is a direct result of liquidity. At some point, the lack of breadth will override the liquidity factor and that’s when the greased pig will once again be out of his cage. Until such time, this levitation act continues with another level now being added to this mammoth house of cards.

If you would like more specifics as to our 2006 outlook, the cyclical implications, the trend quantification and statistical expectations, expected turn points and much more, then visit www.cyclesman.com for subscription information. Please, get armed and get the technical and statistical facts.

Tim W. Wood

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