In early 2018 the major stock market indices peaked and gave way to a short-term correction. That peak, though, was likely the start of an 18-24 month consolidation.
Since that time, the S&P 500, Nasdaq, Nasdaq 100, and Dow Jones have made marginal new highs (2-5 percent higher). The Russell 2000 has not… and remains 12 percent below its early 2018 highs.
As well, several other indices like the NYSE Composite and S&P Mid-Caps have remained under the highs, creating bearish divergences and reasons for investors to remain picky and cautious. We’ve also seen several sell-offs and bursts of volatility during this time.
Today, we look at Dow Theory and discuss yet another divergence between the Dow Industrials INDEXDJX: .DJI and Dow Transports INDEXDJX: DJT and what it means for the market.
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Dow Jones Industrial Average “Daily” Chart
Dow theory says that both indices should confirm one another. For instance, if one makes new highs, a new bull market leg higher is confirmed when the other does as well (in sync). When one makes new highs and the other doesn’t, it’s a non-confirmation.
That is precisely what we have today. As you can see in the charts below, the Dow Industrials have been in consolidation with a bullish bent. The Dow Transports have not – no new highs and falling moving averages.
Until this (and other divergences) begin to change, the market will be in a broad consolidation (a 15 percent range or so). I’m thinking another 6 months or so.
Dow Jones Transportation Average “Daily” Chart
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