Ralph Acampora: Dow Theory Divergence Signals Caution

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The following is a summary of our recent interview with well-known market technician Ralph Acampora, which can be accessed on our site here or on iTunes here.

Ralph Acampora

Divergence in Sectors Says Be Aware

We’ve seen Dow Industrials heading higher recently, while Transports have been struggling. From Acampora’s Dow Theorist perspective, he sees indications that the move higher may be wearing thin.

“For those who follow the theory, in any kind of rally from current levels, you want both indicators to make new highs,” he said. “If they don’t, then this divergence … suggests that maybe we’re in the latter innings of this move.”

When he looks at current charts, particularly in the tech sector, for example, he’s starting to get a nosebleed, he stated.

“It’s starting to go parabolic,” Ralph said. “I don’t know how greedy one wants to be. If you want to hang in there and try to get every nickel out of the run, God bless you, go ahead. But you better have some stops in there somewhere along the line because you can’t continue at that rate.”

Still a Secular Bull, But Watch out Short-Term

Despite divergences, Acampora is still a secular bull. A secular move can last for a couple of decades, he noted, and with this current move higher beginning from the low of March 2009, he believes we still have room to go. But that doesn’t mean we won’t see problems develop in the short-term.

“We’re 8 years into this, and we haven’t had a significant pullback or correction in quite some time,” he said. “When I look at the current market, I see it as very split. For example, look at today. The Nasdaq is at an all-time new high and the Dow is struggling. That’s classic.”

Various sectors are doing well, such as Technology and Industrials, while others are making new lows, such as energy. The financials are rolling over, he added.

“For the first time in many months, I’m taking my foot off the pedal a little bit,” he said. “I don’t want to sound like a super bear because I’m not … I am a secular bull, and I’m looking at the long-term, and I’m very optimistic. But in the near term — and I define the near term as the next several months — I think you have to be very selective.”

He likes Consumer Discretionary (XLP), Consumer Staples (XLY), Industrials (XLI), Technology (XLK) and Utilities (XLU), he noted.

What Might Trigger a Move Lower?

The traditional 6-month presidential honeymoon period in markets is almost over, Acampora stated. We also haven’t seen tax cuts or regulatory reform yet, either, and he sees these as increasingly less likely to materialize soon.

“Honeymoons come to an end,” he said. “Even Ronald Regan’s honeymoon only lasted 6 months, and then he had a bear market. That’s not unusual.”

We often see markets stumble starting towards the end of a new administration’s first year and into its second year. However, the second half of the president’s term can still produce moves to the upside, which is what he expects will happen.

We’re also seeing a Federal Reserve that appears likely to raise the key interest rate again in June, which might produce a stumble in the markets, Acampora noted.

Words of Wisdom for Investors

For younger investors, Acampora still advises putting money away on a dollar cost average basis as early as possible. For those closer to retirement, dividend-paying stocks are attractive.

At heart, he’s optimistic about the economy.

“I have a farm in Minnesota, and on the farm, I have a big barn,” Acampora said. “I’ve been in Wall Street for 50 years. This summer, I’m going to hand paint the largest chart of the Dow Jones Industrial Average in history going back 50 years. I’m going to put a little quote at the end of it: ‘It pays to be an optimist.’”

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