The wise man sees in the misfortune of others what he should avoid.
- Marcus Aurelius 121-80 AD, Roman Emperor, PhilosopherThe Dow has gone on to put in a series of new 52 week highs, something that has eluded both the transports and the utilities. We personally do not place too much emphasis on the Dow Theory which focuses on the transports, we. However, to do place quite a bit of weight on the utilities as they generally lead both the industrials and the transports. At the very least the Utilities should have put in one new 52 week high and more importantly they should have done it before the industrials and or the transports. As both the transports and the utilities have not put in new highs we have what amounts to a double non confirmation signal. This suggests that at the odds of the Dow mounting a strong to decent correction are pretty high.
If we examine the 20 stocks that make up this average we find that at least 10 of 20 stocks have not put in new highs. The stocks are BNI, AMR, LUV, UNP, CAL, EXPD, GMT, JBLU, NSC, and OSG. The index is therefore, being carried higher by only 10 stocks.
Finally, in the early stages of the rally total volume traded surged to and past the 7 billion mark several times but not one single high took place on even 7 billion shares of volume. In fact, since the 17th of Sept total volume on the NYSE has not even once reached the 7 billion mark.
The 3 charts clearly illustrate the divergence between the Dow industrials, the Dow transports and utilities; the Dow has put in a series of new 52 week highs while the transports and utilities are struggling to get there. Prudence and caution are warranted now and traders should think twice before jumping into the markets.
The young man knows the rules, but the old man knows the exceptions.
- Oliver Wendell Holmes