THE THREE DOW AVERAGES ARE GIVING BEARISH MESSAGES -- THE DOW TRANSPORTS ARE FALLING THE FASTEST -- WHILE THE UTILITIES ARE DOW LEADERS -- TRANSPORTATION/UTILITIES RATIO FALLS TO LOWEST LEVEL OF THE YEAR
THE DOW RETESTS 200-DAY LINE... My last two messages spelled out a lot of technical reasons that are bearish for the stock market, and increase the odds that the nine-year bull run is ending. Besides the heavy selling that's taken place during October, my weekend message showed a number of serious negative divergences showing up on the market's weekly and monthly charts. Yesterday's message included the Sector Rotation Model which showed that rotation into consumer staples, utilities, and healthcare stocks usually occur near the end of major bull markets. And money is rotating there. While money is flowing out of economically-sensitive groups like consumer discretionary and industrial stocks, as well as growth-oriented technology. And those are the very groups leading this month's stock retreat. We can also see that negative rotation taking place within the three Dow Averages. Chart 1 shows the Dow Jones Industrial Average continuing to threaten its 200-day average. That's a very important test. The bigger problem lies with the Dow Transports which have already fallen below their 200-day line (see Chart 2).
(click to view a live version of this chart)
Chart 1
(click to view a live version of this chart)
Chart 2
THE DOW TRANSPORTS ARE LEADING THE INDUSTRIALS LOWER ... Chart 2 (above) shows the Dow Jones Transportation Average not only trading below its 200-day average. But this week's rally attempt met resistance at the red 200-day line. That failure is important for a number of reasons. Dow Theory holds that a bull market can only exist when both Dow Averages are in uptrends. That's no longer true for the transports. The transports are a more economically-sensitive group. As such, they usually do better than the industrials at market bottoms (like 2009), but drop faster at market tops (like 2007). Right now, they're dropping faster. Chart 3 (below) shows a relative strength ratio of the Dow Transports divided by the Industrials falling to the lowest level of the year. That's not a good sign for either one. But there's more. While the Transports are underperforming the Dow Industrials, the Dow Utilities are the strongest of the three.
(click to view a live version of this chart)
Chart 3
THE DOW UTILITIES ARE OUTPERFORMING ... Chart 4 shows the Dow Jones Utility Average trading above its 50-day and 200-day moving averages and near its high for the year. The defensive utilities have been the past month's strongest sector (just ahead of consumer staples and healthcare). And better than the Dow Industrials. Chart 5 shows the relative strength ratio of the Dow Utilities divided by the Industrials rising to the highest level in two months, and moving closer to its high for year. Historically, utilities usually underperform the Industrials at bottoms, and outperform at market tops. Right now, they're outperforming which is another weak signal from the Dow family. A direct comparison of the utilities and transports also carries a bearish warning.
(click to view a live version of this chart)
Chart 4
(click to view a live version of this chart)
Chart 5
TRANSPORTS/UTILITIES RATIO FALLS TO LOWEST POINT OF THE YEAR ... Chart 6 plots a ratio of the Dow Transports divided by the Utilities. And it shows the ratio undercutting its July low to fall to the lowest level of the year. It's not a good sign when an economically-sensitive group like the transports breaks down versus a defensive group like the utilities. Today's heavy selling reflected more of that damage. The Dow Industrials fell -1.2% while the transports lost more than twice as much (-2.6%), and were the day's biggest losers. Utilities gained +0.18% and were the day's strongest sector. Relative action in other sectors also painted a weak picture. The two other strongest sectors were REITs (+0.03%) and consumer staples (-0.13%). Outside of those defensive sectors, everyone else went south. Technology (-1.96%) and consumer discretionary (-1.92%) were the day's weakest performers, along with industrials and financials. Small caps continue to lead large caps lower, which is another sign of weakness.
(click to view a live version of this chart)
Chart 6
S&P 500 AND NASDAQ RETEST 200-DAY LINES IN HEAVIER TRADING ... Today's selling put 200-day averages in jeopardy once again. Chart 7 shows the S&P 500 closing right on its 200-day average (red line). The fact that trading picked up today increases the odds that the red line will be broken. Chart 8 shows the Nasdaq Composite closing just below its 200-day line. Trading activity picked up there as well. The Nasdaq's drop of -2% today reflected another day of heavy selling in technology stocks. Friday's close is usually the most important of the week. That makes tomorrow an especially important day.
(click to view a live version of this chart)
Chart 7
