A few weeks ago we looked at the non-confirmation between the Industrials and the Transports as well as a few non-confirmations within the Transportation sector. Today, I want to follow up on the ongoing Dow theory non-confirmation as well as some of the ongoing non-confirmations that are occurring outside of the Industrials and the Transports.
In the first chart below we have the Industrials verses the Transports. First, let me make it clear that non-confirmations in and of themselves are not buy or sell signals. In fact, according to Dow theory, nothing has occurred at this time to tell us that the trend has been revered. Non-confirmations are warnings that something is not quite right. Also, the fact that this non-confirmation has been ongoing for months now does not mean that it is no longer valid. The line in green merely serves to represent the fact that the Industrials have moved above their May highs, while the Transports have lagged. The red line serves to point out that within this broader non-confirmation, the Industrials have moved above their July high, while the Transports have not. So, this leaves us with what is in affect two upside non-confirmations.
In fact, we know that Dow theory non-confirmations have occurred at 81% of all 4-year cycle tops since 1896. If you have been reading my comments here for any length of time then you know that it is my belief that this ongoing advance has been a push into the 4-year cycle top and that the 4-year cycle low is still ahead of us. This single statistic surrounding this Dow theory non-confirmation is indeed in support of this view, but there are also many other statistical and technical facts that support this view. So, don't think that this is the only basis for my opinion because it isn't. There are in fact numerous statistical facts surrounding my reasoning on the 4-year cycle.
For the record I want to point out that the last such non-confirmation occurred at the last 4-year cycle top in 2000 and this can be clearly seen in the chart below.
Prior to 2000 the last such non-confirmation occurred at the 1998 4-year cycle top as well. I could go on, but there is no need. The statistic is that 81% of all 4-year cycle tops occur in conjunction with a Dow theory non-confirmation, so don't be complacent about the current non-confirmation.
In the next chart below I have included the Industrials and the Dow Jones Select Top Ten Index. This index is composed of the top ten dividend yielding stocks within the 30 Industrials. This non-confirmation is telling us that we are seeing a deterioration within the 30 Industrials just as I showed you was taking place beneath the surface of the Transports a few weeks ago. If this deterioration within the Industrials continues it will take a toll.
In the next chart below I have included a chart of the Industrials and the Retail Holders Index. Here to, I want to point out that we currently have a non-confirmation between these two indexes as is noted in blue. I also marked previous upside non-confirmations in blue and previous downside non-confirmations in red. Point being, the current upside non-confirmation by the Retailers right here at Christmas time is also now sending a warning to the broader market.
Now, let me remind you of a few quotes from the great Dow theorists of the past on non-confirmations. Understand that Mr. Rhea and Mr. Hamilton were talking about non-confirmations between the Industrials and the Rails, which we do in fact have in place today. But, the principle is also the same between these other indexes. Here are a few quotes from the masters.
Robert Rhea - "A wise man lets the market alone when the averages disagree."
Robert Rhea - "When the averages disagree they are shouting ‘be careful.'"
Robert Rhea - "The most useful part of the Dow theory, and the part that must never be forgotten for even a day, is the fact that no price movement is worthy of consideration unless the movement is confirmed by both averages."
William Peter Hamilton - "In the study of the price movement, based upon Dow's theory, so successfully applied in The Wall Street Journal for the last twenty years or more, it has been repeatedly found that the two averages must confirm each other to give an authoritative prediction."
William Peter Hamilton - "Independent movements on previous experience are usually deceptive, but when both averages advance or decline together, the indication of a uniform market movement is good."
William Peter Hamilton - "A new low or a new high made by the one (average) but not confirmed by the other, is almost invariably deceptive. The reason is not far to seek. One group of securities acts upon the other; and if the market for Railroad stocks is sold out, it cannot lift the whole list with it if there is s superabundant supply of the Industrials."
William Peter Hamilton - "It seems a clear inference in a movement where the averages do not confirm each other that uncertainty still continues as concerns the business outlook."
William Peter Hamilton - "The movement of both the railroad and industrial stock averages should always be considered together. The movement of one price average must be confirmed by the other before reliable inferences may be drawn. Conclusions based upon the movement of one average, unconfirmed by the other, are almost certain to prove misleading."
William Peter Hamilton - "Dow's theory stipulates for a confirmation of one average by the other. This constantly occurs at the inception of a primary movement, but is anything but consistently present when the market turns for a secondary swing."
William Peter Hamilton - "When one breaks through an old low level without the other, or when one establishes a new high for the short swing, unsupported, the inference is almost invariably deceptive."
William Peter Hamilton - "Indeed it may be said that a new high or a new low by one of the averages unconfirmed by the other has been invariably deceptive. New high or low points for both have preceded every major movement since the averages were established."
William Peter Hamilton - "The two averages may vary in strength, but they will not vary materially in direction especially in a major movement. Throughout all the years in which both averages have been kept, this rule has proved entirely dependable. It is not only true in the major swings of the market, but it is approximately true of the secondary actions and rallies. It would not be true of the daily fluctuations, and it might be utterly misleading so far as individual stocks are concerned."
Again, these non-confirmations are only one of the many reasons for my concern and caution for the ongoing advance, but also understand that non-confirmations are not sell signals. Let me add here that from a Dow theory perspective, this advance is in fact still intact. In order to confirm a down turn we will have to see a move by both averages below their previous secondary low points.
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