DOW THEORY SIGNAL AFFIRMED - AIRLINES POWER DOW TRANSPORTS - INTERMARKET CORRELATIONS BLUR - COMMODITIES ARE NEGATIVELY CORRELATED WITH BONDS - DBC BREAKS CHANNEL RESISTANCE - TLT HOLDS BREAKOUT

TRANSPORTS AND INDUSTRIALS FORGE HIGHER HIGHS... Video Link (click here). Last week I noted that the Dow Industrials had yet to break its late August highs and that a non-confirmation could be brewing. With the advance over the last five days, chart 1 shows the Dow Industrials easily clearing its late August high to notch another higher high. Moreover, the Dow Transports also continued higher with a big move above 4000. Higher highs in both key Averages affirm the Dow Theory bull signal. As with many indices and ETFs, the September-August lows mark key support for the medium-term uptrend. A Dow Theory bear signal would not be triggered until BOTH close below their August-September lows.

Chart 1

AIRLINES LEAD TRANSPORTS... Last week I also showed charts of the Dow Transports breaking resistance and the DJ Airline Index ($DJUSAR) challenging resistance. Last Thursdays subsequent breakout in the Airline Index provided a big lift to the Dow Transports. Chart 2 shows the index breaking resistance with a long white candlestick and then surging above 60. Broken resistance just above 50 becomes the first support level to watch on any pullback. Chart 3 shows a Perfchart with the Dow Transports and the key components within the Dow Transports (red line). This is an excellent way to identify the leaders and laggards within a particular index, sector, industry group or ETF. Simply pick your index, identify its main components and then add them to the PerfChart. For the Dow Transports, I identified three industry group indices and two key stocks. The performance line for the Dow Transports is red. Those above the red line show relative strength, while those below show relative weakness. Since early July, airlines have been leading the way higher with a truly outsized gain (>60%).

Chart 2

Chart 3

INTERMARKET RELATIONSHIPS SINCE MARCH... Chart 4 shows John Murphys Intermarket Perfchart over the last 5+ months. From March to September, a steady decline in the US Dollar Index ($USD) accompanied the steady rise in the stock market. Stocks and the Dollar have a consistent inverse correllation right now. John Murphy and I have been pointing this out for weeks. Despite a clear relationship between stocks and the Dollar, the relationship between stocks and bonds is getting blurred. The same goes for the relationship between stocks and commodities. The blue dotted lines mark recent lows in the S&P 500. Notice that commodities moved higher and bonds moved lower as the S&P 500 surged from these lows.

Chart 4

In general, I see a positive correlation between stocks and commodities, but a negative correlation between stocks and bonds. Even though the CRB Index ($CRB) is up over 25% from March to September, the rise has not been steady, which detracts from this positive correlation. Chart 5 shows a Perfchart with just the CRB Index and the S&P 500. The CRB Index was up over 25% in mid June and again in early August. With the index still up just over 25% in September, performance has been relatively flat the last three months. Despite a rising stock market and falling Dollar, the CRB Index has little to show the last three months.

Chart 5

The negative correlation between stocks and bonds is also getting a test. Chart 6 shows a Perfchart with just the S&P 500 and 30-year Treasury Bond. Notice that the 30-year Treasury Bond ($USB) was down around 10% in early June. With the 30-year Treasury Bond down less than 6% now, the long bond has actually gained since early June. This means that both stocks and bonds are up since early June. Something may have to give here.

Chart 6

BONDS AND COMMODITIES ARE INVERSELY CORRELATED... Commodities appear to have a bigger affect on bond prices. Chart 7 shows the CRB Index ($CRB) with the 30-year Treasury Bond ($USB). The inverse correlation between these two is striking. Bonds move down as the commodities move up (yellow areas). Bonds move up as commodities move down. The biggest decline in bonds occurred from March to early June. This corresponds to a big rise in the CRB Index. Most recently, the 30-year Treasury Bond surged off its August low as the CRB Index declined in August. However, the CRB Index turned up in September and this could put pressure on bonds. A rising CRB Index hints at inflation, which bonds loathe.

Chart 7

DBC BREAKS CHANNEL RESISTANCE... Now lets take a look at the Commodity Tracking Fund (DBC) on chart 8. The ETF formed a lower high in early August and declined into early September. This decline retraced just over 62% with a falling channel. With a surge over the last eight days, DBC broke above channel resistance. This is quite positive. Also notice that DBC is starting to outperform the 20+ Year Treasury ETF (TLT) as the price relative turned up over the last 1-2 weeks. DBC is stalling today, but the breakout is holding and remains bullish until proven otherwise. A move back below Mondays low would negate this breakout and put the downtrend back in play.

Chart 8

TLT HOLDS BREAKOUT... As the Commodity Tracking Fund came down in August, the 20+ Year Treasury ETF (TLT) broke resistance around 93-94.5 (chart 9). This broken resistance zone now turns into a support zone, which held in late August and early September. With DBC and TLT breaking out, something may have to give here as well. I am marking support for TLT at 93. The breakout is bullish until proven otherwise with a move back below 93.

Chart 9