Morning Tack - “Dow Theory Redux”

Jeffrey D. Saut, Chief Investment Strategist | (727) 567-2644 | December 14 2018 | 7:45 AM EST

Forgive me, but I am sick of answering questions about Dow Theory since there are FAR too many pundits that have not studied Dow Theory and, therefore, do not understand the concept put forth by Charles Dow, expanded on by Robert Rhea, William Hamilton, and our dear departed friend Richard Russell of Dow Theory Letters, which I have read since I began in this business in 1971 (I actually wrote an epitaph about him a few years ago). Yesterday’s questions were summed up in this composite letter from a Raymond James’ client:

“Can you explain why you are using the March 2018 lows of the D-J Industrials for a Dow Theory sell-signal instead of lows made since the new confirmed highs were made.”

So this is the last time I am doing this. First, the new all-time highs by the D-J Transports were made in September of this year along with new all-time highs from the D-J Industrials. Since then, both of those major indices have been on the skids. While it is true the Transports have broken below their closing low of the past 12 months, the Industrials have not. The trailing 12-month closing low for the Industrials was made on March 23, 2018 at 23533.20. By the method of interpreting Dow Theory that I was taught by my father, and after extensive readings of Charles Dow, Rhea, Hamilton, and Russell, THAT is the closing low that should be used as a confirmation by the Industrials of the breakdown by the Trannies, QED!

“Can you explain why you are using the March 2018 lows of the DJ Industrials for a Dow Theory sell-signal instead of the lows made since new confirmed highs were made?”

. . . A Raymond James client

“To view graph click HERE

. Source: FactSet. Data as of 12/14/18 6:57 a.m.

So yesterday’s Dow Theory questions were prompted by the slide in the Transports from their December 3, 2018 intraday high of 11044.67, into yesterday’s intraday low of 9604.23, for a 10-day pullback of some 13%. The culprits of yesterday’s decline seemed to be the airline stocks, which surrendered roughly 5% for the session on warnings about future revenue growth. Why revenue growth is in question is a mystery to us, since we fly roughly 200,000 air miles a year and are ALWAYS on full planes, but there you have it.

Then there was this from savvy seer Jason Goepfert (SentimenTrader):

"CFOs are pessimistic. A survey of 500 corporate CFOs shows that, during the recent quarter, they have become the least optimistic on the U.S. economy’s prospects in 7 years. Mom & pop are, too. The latest survey from the American Association of Individual Investors showed a big drop in optimism. The Bull Ratio dropped to 30%, the lowest since February 2016. Bank blahs. Several of the largest banks in the U.S. are down at least 7 days in a row and trading at 52-week lows. For the 2nd largest bank, BAC, it’s the first time since 2011. It’s happened 6 times in 25 years, leading to rebounds three weeks later 4 times."

The Industrials were again unable to hold their early gains, leaving yesterday’s declining issues at 64% of total Advancing to Declining issues. Downside volume also dominated with 60% of total Up/Down Volume coming on the downside. This morning, Theresa May’s bid to rescue the Brexit deal is rejected by the EU, the National Enquirer newspaper says it will share all of the information it has on the President (this is a big deal), and very weak economic reports out of China and Europe have left the preopening S&P 500 futures down some 22 points as we write at 5:20 Friday morning. If that holds into the opening bell, it means the S&P 500 (SPX/2650.54) is going to test the 2580-2600 level again. Good grief . . .

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“To view graphs and to read more click HERE