One Signal Stands Out

By Duru

September 29, 2004


As the market rallies, I thought I would finally chime in again with my usual glib cheer. In a previous missive earlier this month, I noted how Dow Theory showed we were at a critical juncture. Well, the market failed the test….and now sooner did the Dow turn south from its downward trendline, the transports came down swift, hard, and fast from their 52-week highs. Dow Theory says we should expect more pain ahead. Sure Caterpillar had some marginally cheery news yesterday, the GDP was revised upward slightly to 3.3% from 2.8%, and the market is excited about oil bouncing around $50/barrell, but the trends are inescapable. These trends are a sober reminder that despite the increasing bullishness amongst pundits and the incessant anticipation of a pre-election rally, the major market indices are still trickling downward ever so slowly.

I am even MORE amazed at how blasé, and nonchalant pundits are becoming about any potential fall-out from Iraq on the market. This comment is completely anecdotal, but I always get chills when I see these folks dismiss any concerns about Iraq. They act as if the war is essentially over as they note that what happens in Iraq now has no real economic impact. Ironically, when fear was greatest in early 2003, the market bottomed. Now that fear has subsided (about Iraq anyway), we see the market looking like it is slowly topping out.

How can we forget about the tens of billions of dollars we are pouring into Iraq (not to mention the mounting deaths and bodily injuries)? Certainly even Greenie cannot keep printing all that money? Certainly even another Republican administration will be hard-pressed to keep paying for this war by REDUCING taxes!? (And most unfortunate is that the challenger for the presidency, John Kerry, continues to be less than inspirational in coming up with any kind of a credible alternative to the brewing disaster in Iraq). Any casual examination shows that U.S. has kicked over anthills in its attempt to exterminate pests. Instead of containment and eradication of threats, we now see threats scurrying about everywhere. Instead of stamping out terrorism with shock and awe, Iraq has become more of a hotbed for terrorism than it ever was. Terrorists could not be happier having us so close at hand. Woe be to whomever inherits this disaster. The implications seem more and more distant now, but over the "long-term" we need to be vigilant in monitoring the implications of the U.S.'s increasingly imperialistic approach to the Middle East. I bet the oil markets are…!

Anyway, let us look at one of the signals that stands out in the market - it is the steady march downward of the Dow. Notice how it has continued to slip neatly along the downward channel this year:



And now for a close up of how Dow Theory works. Just as the Dow failed to break free from its downtrend (this is a "close-up" of the chart above) ….



….the Dow Transports average made a quick bee-line south. We should not expect that high to be broken until the Dow finally breaks free of its downtrend (there are other scenarios too of course). Again, if such a thing happens, I will happily go full Bull again!



Be careful out there!


Ó DrDuru, 2004