Reply #1: WrapUp by Tim W. Wood

[ozymandius]

THE DOW REPORT
I No Longer Trust the Summer Rally

This was not a bad week for the markets. The Industrials were up 168.66 points or 1.48%. The Transports were up 208.64 points or 4.97%. The S&P 500 was up 20.95 points or 1.61%. As a result, many have e-mailed me this week asking if the Dow theory non-confirmation is really still relevant or valid. Others have asked me if it has been corrected with this week’s advance. I also received e-mails this week informing me that lack of confirmation by the underlying internal strength indicators is no longer applicable. Additionally, I’m receiving a number of e-mails on the 4-year cycle. Some are asking me if it was possible that the June/July lows marked the 4-year cycle low, while others are informing me that the June/July lows marked the 4-year cycle lows and that the markets are now off to the races.

The signal that these e-mails send me can be summed up in one word: Complacency. Of course, the non-confirmation is still valid. One-hundred and ten years of market history has not been nullified in the last few days, the last month, the last year or even since 2002. In the first chart below you can see that the dual non-confirmation between the Industrials and the Transports still exists. The first non-confirmation is marked in blue and occurred when the Transports fell below their June low, while the Industrials held above that level. The second non-confirmation is noted in red and came when the Industrials bettered their early July high, but the Transports failed to follow. As a result, both non-confirmations still exist, and to say that they are no longer valid is to say that the Dow theory and its one hundred and ten years of history is no longer applicable.

-see chart-

Thus far, nothing has happened to cause me to change my view on the market. Based on my trend quantification work and my intermediate-term Cycle Turn Indicator, I looked for and called the market top in May. I then looked for the summer low and when it occurred I said, “the Summer Rally has begun.” At present, I no longer trust this advance. I still believe that Dow theory is every bit as relevant today as it has been in the past and we still have a Dow theory non-confirmation in place. Furthermore, I still believe that the underlying internals are relevant. Sure, the market can be manipulated in the short run, but manipulation only serves to make matters worse in the end. This is a time for caution and skepticism rather than complacency.

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