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THE DOW REPORT
The Market Holds, But On Continuously Fading Internals

Yes, according to Dow theory, the Secondary trend remains positive. My intermediate-term Cycle Turn Indicator had turned down at the March high, but then turned back up in association with the April low. So, as of this writing, things are once again positive for the market from a price perspective. However, the internals continue to lag with the latest cycle advance being the weakest since the advance out of the 2002 low began. When I say weakest, I mean internally. Below I have plotted a chart of the Industrials along with an intermediate term advancing issues line in green and the corresponding declining issues line in red.

There are a couple of things to note here. One, each of the advancing issues lines associated with each of these intermediate term cycles has occurred at a lower level than the previous one. Two, as the market moved up into each of these intermediate term cycle tops, the advancing issues began to diverge with price. This non-confirmation occurs as a result of a thinning market, which is a naturally occurring phenomenon at cycle tops. Advancing issues, now only marginally above declining issues, as price has made a new recovery high is simply not healthy. Sure, price is positive, and I’m not here to argue the obvious. But what I am telling you is that the health of the advance is poor and bulls should continue to dance close to the door.

In addition to the fading breadth data, we continue to also have important non-confirmations that continue to linger. One such non-confirmation is between the Industrials and the Dow Jones Top Ten Index. For those not familiar with this index it represents the top ten dividend yielding stocks within the Industrials. A few weeks ago I discussed this non-confirmation and I bring it up again because it is important and still exists. The longer-term non-confirmation is noted in red and green. The shorter-term non-confirmation is marked in blue. The fact that these non-confirmations continue to exist is troubling for the market as the last such non-confirmation occurred surrounding the 2000 top.

Another important non-confirmation that we need to be aware of is between the Industrials and the Nasdaq 100. The current non-confirmation is marked in blue as is the last two, which both occurred at intermediate term cycle tops. Unless/until the current non-confirmation is corrected, this too weighs on the Industrials in that this serves as further evidence of the thinning market advance that is being reflected by the advance decline data.

Understand that these non-confirmations and weak internals are not signals, but are rather signs of the times. They are indications of changes that are in the making. If you would like more information surrounding my 2006 outlook, my intermediate-term Cycle Turn Indicator that is used to identify every major turn point and more, then visit www.cyclesman.com for subscription information.

Tim W. Wood

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