The market looked weak on Monday, saved only by a late spurt of buying that narrowed the losses. It may not be the last time it looks weak.
The much ballyhooed Dow Theory is flashing a warning sign: While the Dow Transports made a new high in March, the Dow Industrials did not. The latter’s failure to hit a new high is currently a red flag.
“This leaves a Dow Theory non-confirmation still in place,” said technical analyst JC Parets, founder of Eagle Bay Capital.
Why? Well followers of the century-old Dow Theory–popularized by Charles Dow–maintain the industrials and transports need to move in lockstep to confirm a market’s trend. A pattern of higher highs and lower lows serves as confirmation of the market’s move.
The theory is based on the thinking that making goods is one leg of the industrial economy and moving those goods around is the second leg, so their trends should be in sync.
Since the Dow Transport hit a year-to-date high of 7627.44 on March 7, both the transports and industrials have sagged. The Dow Transport closed at 7510.38 Monday, while the Dow industrials finished at 16276.69.
To see another buying signal, the Dow industrials would have to cross above its early March levels, while the transports would need to maintain its momentum.
“It would take a close above 16588 in the Dow (industrials) this week to corroborate the new high in the transports and clear the way for more near-term U.S. broad market strength,” wrote the team at Asbury Research. “Until then, this warning signal remains intact.”
A sell signal would be triggered if both made new lows, and Mr. Parets pointed to the Feb. 3 lows, 15373 for the industrials and 7054 for the transports, as the critical levels. “This would tell us that the trend has changed,” he wrote. “Until then, it’s more of a red flag (a big red flag).”
Asbury thinks the market is at a “minor inflection point,” and if new highs aren’t made between now and the end of the month, the market could turn back down (they pointed to 1825 on the S&P 500 as a key level), and it would be “the beginning of an overdue correction.”
Morning MoneyBeat Daily Factoid: On this day in 1911, in New York City, a fire began in a rag bin in a factory building. The workers, almost all teenage immigrant girls, began to leave the building. The one working elevator held only 12 at a time. Then it broke down. The fire spread. The increasingly desperate women tried other avenues of escape, like a narrow stairwell, only to find the doors padlocked. Many simply jumped from the windows to their deaths. Fully 145 women died at the Triangle Shirtwaist Co. factory in lower Manhattan that day, one of the worst industrial disasters in U.S. history. It was an event that galvanized union forces and led to lasting changes in the workplace.
-Paul Vigna
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