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Weekly Reversal Report For 6/1/2015 ECA Was Close But Not Close Enough. Should We Be Worried About Dow Theory And The Dow Transport Index?

The Three Stooges Via Boston Globe

Isn’t this cycle getting a little monotonous? Once again this week, a large plurality or majority of stocks in energy production and exploration showed up( 3 of the 6 that survived this week), and NOT ONE passed the neural net screening process. This reminds me a lot of the end of 2007 and beginning of 2008, when it seemed like we could not make new headway and the markets were topping out a bit. Regardless of that, the U.S. equity markets defy all gravity and continue to press to new highs even with some dramatic pullbacks after hitting them.

I cannot (and will not) publish names that will not pass the minimum screens, so there is nothing to trade this week. Of the 20000 stocks surveyed, only 6 made the first cut:

VNET  Internet Service Provider

WNR Petroleum Refining

ECA  Petroleum Exploration and Production

EC    International Energy Production

VIV  Telecom Services

TDC Computer Memory Devices

CCJ Uranium Mining

I would probably keep WNR ECA VIV and TDC on the watch list. WNR and ECA are dependent on the price of crude oil ( as NFX is). Until we get a line on what crude oil will really do in the next 6 to 12 months, I think these names are still toss-ups.

I really apologize for the dearth of names meeting the fundamental, technical, and neural net screens, but that is the nature of this market at present. I will continue to search and dig out the good stuff as it becomes available.

WHAT DO THE DOW TRANSPORTS AND THE DOW JONES INDUSTRIAL INDEX SEEM TO INDICATE ABOUT THE U.S. EQUITY MARKETS? An internet marketing expert chided me this past week for writing like an academic, but if you want to learn something, you need to READ IT AND STUDY IT. Here is a good discussion of Dow Theory . STUDY IT. What I am going to do is to pull back to a monthly chart basis, and then quickly discuss how what I see varies from typical Dow Theory. I will also try to explain WHY and WHY we might want to be a little more worried than we might be otherwise.  If I get more votes, I can go further into detail about it. You should AT LEAST be aware of it, as even though it is an often discredited “theory” created over a century ago, you would be absolutely amazed at the number of institutions that track this concept.

I had a couple of problems with data sources again this week, but being the intrepid redneck that I am, I pulled up ETF surrogate for the Dow Jones Industrial Index (DIA)  and an ETF surrogate for the Dow Jones Transportation Index (IYT). Both are monthly charts.  Notice that even though DIA is making new highs, IYT is NOT! Transports are not confirming new highs, and that should make perma-bulls at least a little nervous about the continuation of this multi-year rally from the quantitative easing (QE) instigated low of 2011.

Note that the gray dotted line only connects the two major lows in this last rally. For reasons I will not go into here (even though for full understanding, you need the Fibonacci retracements to understand why), we are likely to see that underlying trend line TESTED by a correction before we would begin to “soil our shorts” over a potential major break in the rally. That would give a potential correction in the Dow Jones Industrial Index ($INDU) below 16,000. That is not such a big deal in context, but, what IS different is that the Federal Reserve is out of bullets with short-term interest rates effectively at zero. There are other ways to shift assets on the Federal Reserves balance sheet, but it likely will not be all that effective.  We will have to observe what happens to GDP and consumer spending as this year progresses. Economic growth at below historical norms and wages stuck in neutral in the US for nearly two decades are not exactly belweather pre-conditions for a consumer led economic boom. There are lots of questions both domestically and internationally that have to be answered. The Eurozone is still in crisis over currency, solvency and austerity in public spending. Russia is rattling its sabers in Ukraine and the Baltics (not to mention Poland), and China is threatening military action. The Middle East is also not exactly vacation-land at the moment either. It is no longer easy to make logic-based forecasts when so much is up in the air. All one can do at the moment is to watch the precursor market actions that would signal change. What I demonstrated above is certainly one to watch, but maybe not quite yet time to panic over. Still, keep your eyes OPEN!

I got that discussion finished without too many words. Remember folks, even Moe Howard, the organizer of The Three Stooges, used the word “monotonous”. (Of course, he was purported to have an effective IQ of around 200 and had a perfect photographic memory, which is why Columbia Pictures president Harry Cohen was literally afraid to negotiate contracts with him.). Being stupid can be smart :). More is coming, and I will do additional scans over this week to see if anything else pops up in this messy market.

As always, thank you for supporting this blog!

 

 

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