Tim W Wood CPA's Contributions

On August 4th both the Industrials and the Transports closed below their previous secondary low points. This is the first time since the March 2009 low that this has occurred and in doing so the primary trend turned bearish in accordance with Dow Theory.

According to Dow theory, both bull and bear markets have three phases. Between each of these phases there are important counter-trend moves. Our Dow theory founding fathers explained that these counter-trend moves are misleading and tend to be taken as a continuation of the previous long-term secular trend.

The post March 2009 closing high for the Industrials occurred on April 29 th at 12,810.54 and for the Transports that high occurred on July 7 th at 5,618.25. This in turn left a Dow theory non-confirmation in place. This was then followed by a close below the March 2011 secondary low points on August 4th.

On August 4, 2011 both the Industrials and the Transports closed below their previous secondary low points. In doing so, the bullish primary trend that began at the March 2009 low was reversed with a bearish primary trend change in accordance with classical Dow theory.

While I do respect this trend change, based on the additional tools that I have available to me through my trend quantification work and the statistical based research, I’m not convinced that the bear is back. In spite of my views that the rally out of the 2009 low is a bear market rally that should ultimately prove to separate Phase I from Phase II of the longer-term secular bear market, I do not believe that this Dow theory trend change in and of itself is ample evidence to suggest that we have resumed the bear market.

Is the current non-confirmation between the Dow Jones Transports and Industrials an indication that the advance from the 2009 low is over? The short-term answer is, no. According to Dow theory, this may be an intermediate or short-term top within a still upward primary trend.

As I was watching CNBC earlier this week, they had a poll question asking people what they were most worried about. That being, corporate results, no debt deal, Europe, or nothing because they’re a Cramer bull. I’ve also received a few e-mails asking how these issues could affect my cycles work and even Dow theory.

I’ve received a few e-mails asking if the decline into June, below the May lows, triggered a so-called “Dow theory sell signal.” The answer is no. From a Dow theory perspective, the advance out of the March 2009 low still remains intact. Dow theory does not give buy and sell signals.

We are now seeing some intra-sector weakness within the Transportation sector. We are also seeing weakness in other areas, such as the automotive sector, banking, housing, commodities and even some of the overseas equity averages to name a few. I have gone back to the inception of the Dow Jones Industrial Average in 1896 and identified a statistical based DNA Marker that has appeared at every major top since 1896. If things evolve in a way in which this DNA Marker appears, then it is highly likely that the decline into the phase II low has begun.

Of late, I have been receiving questions asking how I can justify saying that the advance out of the March 2009 low is a bear market rally. After all, doesn’t a rally of some 26 months have to be a bull market?

As I have stated all along, my research suggests to me that the rally out of the March 2009 low has been a bear market rally. Nothing has occurred to change that point of view. In light of that view, I have received a number of e-mails asking about manipulation and if “they” could prevent such an event from happening.

According to Dow theory, once confirmed, the trend is considered to be in force until it is authoritatively reversed by a joint movement above or below the previous secondary high or low points. In bull markets a joint move by the averages below the previous secondary low points is required to reverse the bullish trend and in bear markets a joint move above the previous secondary high points is required. It is not a requirement of Dow theory that these movements occur on the same day. But, when one average fails to confirm the movement of another average, above or below a previous secondary high or low point, a Dow theory non-confirmation is born.

"The BDI is one of the purest leading indicators of economic activity. It measures the demand to move raw materials and precursors to production, as well as the supply of ships available to move this cargo. Consumer spending and other economic indicators are backward looking, meaning they examine what has already occurred. The BDI offers a real time glimpse at global raw material and infrastructure demand. Unlike stock and commodities markets, the Baltic Dry Index is totally devoid of speculative players."

On July 23, 2009 the primary trend, in accordance to classical Dow theory, was confirmed as bullish. In spite of the fact that our longer-term work continues to suggest that this is a bear market rally that should ultimately prove to separate Phase I from Phase II of a much longer-term secular bear market, nothing has occurred to date to indicate that the bear market rally has run its course.

It seems that most everyone is again focused on commodities and I continue to hear talk of $5.00 per gallon gasoline. I obviously can’t deny the fact that commodities have been in an uptrend. In fact, there is a longer-term cycle that averages some 3-years in the CRB Index.

If this correction should carry both averages below the January 28th lows, on a closing basis, then the next error I see coming from a Dow theory perspective will be that people will be mistakenly calling such price action a Dow theory “Sell Signal.”

On July 23, 2009 the primary trend, in accordance to classical Dow theory, was confirmed as bullish. To date, nothing has occurred to invalidate that setup. According to Dow theory, once the primary trend is established, that trend must be considered intact until it is “authoritatively” reversed, which in this case would require a joint move by the averages back below their previous secondary low points.

At present, we have a Dow theory non-confirmation in place that began in mid-January. According to Dow theory, we must operate under the assumption that the previously established trend is still intact until it is reversed with a move above or below the previous secondary high or low point. In this case, a downside trend reversal would require a move below the previous secondary low point.

According to the sentiment of the e-mails I’ve been receiving of late, it seems that the concept of the advance out of the March 2009 low being a bear market rally is becoming harder and harder to understand. As price moved down into the cyclical lows in late February 2009 I told my subscribers that price was moving into a higher degree low, i.e. the 4-year cycle low, and that the longer the market rallied the more dangerous it would become.

Of late it seems that rising interest rates and the Fed’s ability to “keep rates low” have become a focal point for many of the news commentators. The vast majority of the public believes that the Fed is actually controlling interest rates and as a result that they are controlling the credit markets as well as the equity markets.