Weak Dow Transports, Utilities Suggest Suspect Market
By Ralph J. Acampora
financialweb.com
September 8, 1999
The three Dow averages are not telling the same story these days. The Dow Jones
Industrial Average (DJII) made an important inflection low in June of this year and
then scored another all-time high as recently as August 25. On the other hand, the
Dow Jones Transportation Average (DJIT) and the Dow Jones Utility Average (DJIU)
made lower lows in August and then failed to follow the industrials into new high
ground during the market's most recent rally phase.
Why does this matter? For one thing, Dow theoreticians are concerned about the
disparate trends between the industrials and the transports -- they call it "negative
non-confirmation." This is a clear signal to them that the market remains within the confines of a
secondary correction phase and that these major indexes must both consolidate and then make
respective new closing highs before renewing the DJII's primary bull market signal.
The Dow Jones utilities, on the other hand, also made its recent low in mid-August and then turned up
sharply. Although it did not form a new high as the industrials did, the former index did penetrate its
downtrend, unlike the transports. In all three cases, the recent rally faltered and rolled over.
This near-term downside reaction is neither unusual nor should it be unexpected, however, because the
transportation and utility averages, given their failure to match the industrials, suggest that the rest of
the market is also suspect. The question remains whether they can all consolidate normally above their
recent lows or not. This is an extremely important question because any penetration below these
respective lows would reinstate major downtrends and thus further downside potentials.
For the past two months, I have stated that I am willing to give the Dow Jones industrials the benefit of
the doubt that it will hold above its June low of 10,334.42 and then eventually move to the 12,000-plus
area by the end of this year. This observation is based upon the diverse nature of its 30 components and
that these stocks are actually benefiting from the rotation taking place within the market these days.
But my optimism for the Dow transports and utilities is not as strong. I am concerned that they will
break their respective August lows. Such a move would imply further deterioration in market breadth,
exemplified by the New York Stock Exchange's advance/decline line.
If the scenario outlined above comes to pass, it will appear very similar to the split market that investors
had to endure in 1994. It was a time when interest rates increased, breadth decreased and the Dow
Jones industrials remained within a tight 10 percent trading range all year. |
