Theories abound in the stock market world. Marketwatch has one story based on bearish sentiment of individual investors saying the market will surely soar to new heights. Just below that story they have one based on the Dow Theory that warns of a possible impending crash. I don’t give too much credence to individual investor bullishness or bearishness these days because there are virtually no individual investors in the market. Institutions and their high frequency trading machines control the market. Computers are pre-programmed to buy or sell based on some logic or signal. This indicator may have been useful up until 2001, but the Federal Reserve Put and Wall Street rigging have made it obsolete.
On the other hand, the relationship between the Dow and Dow Transports has been around for a century. Transports are a canary in the coal mine regarding the global economy. If trade and commerce begin to decrease, the Transports know it first. The Dow Transports hit a record high in November. They have steadily plunged by 6% since then, while the overall Dow has eked out a 2% gain. The MSM sure seems to be making a big hullabaloo about record highs, when we’ve only had a 2% gain in six months. This is called a topping formation.
Now to the hard facts. In the last 25 years there have been 14 times when there has been an equal divergence between the Dow and Dow Transports. They included 1990, 2000, and 2007. In 9 of these instances the Dow dropped by 5% to 10%. In 5 of these instances the Dow dropped by an average of 26%. I’m sure the paid hacks on CNBC or the highly compensated Ivy League educated Wall Street economists will have dozens of reasons why these facts don’t matter. They can ignore the facts, but they can’t change them. Maybe it will be different this time, and maybe Janet Yellen will raise interest rates by 1% this afternoon. I wouldn’t bet on either happening.
