Skip to main content

A rally with serious muscle (?)

Dow Theory Letters writer Richard Russell is still bullish on the action in the US market averages.

In recent weeks, Russell has become increasingly convinced that the strong action in the Dow Industrials and Transports off their January lows could signal an "all clear" for the economy and a surprise continuation of the recent upward trend in the US stock market.

He elaborated his position in a recent contribution to Barron's magazine entitled, "A Rally With Serious Muscle". Here are a few excerpts from that piece:

"Dow Theory bolsters the bullish case. On Jan. 22, the Dow transports recorded a low, along with the industrials. A rally ensued, followed by a decline in which the industrials broke to a further low that was "unconfirmed" by the stronger transportation average. From there, the transports headed higher, dragging the industrials along.

In April, both the industrials and the transports rallied above their February peaks. This was a Dow Theory bull signal and reconfirmation of the primary bull trend. Recently, both averages climbed to new recovery highs, another sign the market was ignoring depressing business and economic news.

A final study contributing to the bullish case is the short interest on the NYSE. It has reached a record 15.2 billion shares. In order to make money, short sellers need a declining market, preferably one that's falling amid rising volume, which is unlikely to occur. My guess is the short-sellers eventually will have to cover their positions -- that is, repurchase the borrowed shares they had sold -- resulting in a potentially explosive rally."

We last mentioned Russell's views on the market in our March 27 post, "Stock market wrap up".

In recent weeks and months, Richard Russell's readings of a possible continuation of the long-term bull market have provided an interesting contrary opinion to the who see the current market action as nothing more than a bear-market rally.

Still, (to my mind) there seems to be some disagreement between Dow Theorists as to whether or not the market has confirmed a bullish primary trend.

As noted in the exerpt above, Russell sees the April move by the Industrials and Transports above their February peaks as a, "Dow Theory bull signal and reconfirmation of the primary bull trend".

Meanwhile, as we noted back in our April 11 "Features" post, newsletter writer Tim Wood had pointed out that the recent upward moves in the Dow averages were not enough to confirm a primary bull trend, as they had not broken through their last joint highs reached in July, 2007.

Here's an excerpt from Tim's April 4 "Market Wrap-Up" piece:

"In looking at the chart below you can see that both averages last made joint highs back in July. In Dow Theory terms, this was known as a “secondary high point” in which both averages confirmed one another. From those highs, both averages moved into their August “secondary low points.”

It was the rally out of that low in which things began to deteriorate. As the Industrials pressed higher into their October highs, the Transports lagged, and in doing so failed to confirm the Industrials. This created a Dow Theory non-confirmation at the October secondary high points and is illustrated by the blue trend lines on the chart below. I wrote about this at the time and explained that upside non-confirmations served as warnings that something was wrong."

So it looks like we have some difference of opinion as to what constitutes a confirmation of a primary bullish trend.

Russell's thoughts on the market's discounting abilities are intriguing, but at this point, I'd say we might need to go back and see what exactly constitutes a primary bull trend, from a Dow Theory perspective.

Is the recent upward move by the averages above their February peaks enough to qualify as a bull signal? Or do they need to exceed their joint highs of July 2007 to reestablish the bullish trend?

A quick check of my copy of John Murphy's Technical Analysis of the Financial Markets reveals the following passage: "Dow...felt that both averages must exceed a previous secondary peak to confirm the inception or continuation of a bull market."

Does that mean Tim Wood is right in saying that the "secondary peak" was the joint highs recorded in July 2007? Is this still a bear market, in Dow Theory terms?

What do you say? Are we in a bull market or a bear market rally?

Popular posts from this blog

The Dot-Com Bubble in 1 Chart: InfoSpace

With all the recent talk of a new bubble in the making, thanks in part to the Yellen Fed's continued easy money stance, I thought it'd be instructive to revisit our previous stock market bubble - in one quick chart.

So here's what a real stock market bubble looks like. 

Here's what a bubble *really* looks like. InfoSpace in 1999-2001. $QQQ$BCORpic.twitter.com/xjsMk433H7
— David Shvartsman (@FinanceTrends) February 24, 2015
For those of you who are a little too young to recall it, this is a chart of InfoSpace at the height of the Nasdaq dot-com bubble in 1999-2001. This fallen angel soared to fantastic heights only to plummet back down to earth as the bubble, and InfoSpace's shady business plan, turned to rubble.

As detailed in our post, "Round trip stocks: Momentum booms and busts", InfoSpace rocketed from under $100 a share to over $1,300 a share in less than six months. 

In a pattern common to many parabolic shooting stars, the stock soon peaked and began a…

William O'Neil Interview: How to Buy Winning Stocks

Investor's Business Daily founder and veteran stock trader, William O'Neil shared his trading methods and insights on buying winning stocks in an in-depth IBD radio interview.

Here are some highlights from William O'Neil's interview withIBD:

William O'Neil's interest in the stock market began when he started working as a young adult. 

"I say many times that I didn't get that much out of college. I didn't have much interest in the stock market until I graduated from college. When I got married, I had to look out into the future and get more serious. The investment world had some appeal and that's when I started studying it. I became a stock broker after I got out of the Air Force."
He moved to Los Angeles and started work in a stock broker's office with twenty other guys. When their phone leads from ads didn't pan out, O'Neil would take the leads and drive down to visit the prospective customers in person.

"I'd get in the c…

New! Finance Trends now at FinanceTrendsLetter.com

Update for our readers: Finance Trends has a new URL! 

Please bookmark our new web address at Financetrendsletter.com

Readers sticking with RSS updates should point your feed readers to our new Finance Trends feedburner.  



Thank you to all of our loyal readers who have been with us since the early days. Exciting stuff to come in the weeks ahead!

As a quick reminder, you can subscribe to our free email list to receive the Finance Trends Newsletter. You'll receive email updates about once every 4-8 weeks (about 2-3 times per quarter). 

Stay up to date with our real-time insights and updates on Twitter.