Dow's 52 Week Highs Not Confirmed
The wise man sees in the misfortune of others what he should avoid.
121-80 AD, Roman Emperor, Philosopher
The Dow has gone on to put in a series of new 52 week highs, something that has eluded both the transports and the utilities. We personally do not place too much emphasis on the Dow Theory which focuses on the transports, we. However, to do place quite a bit of weight on the utilities as they generally lead both the industrials and the transports. At the very least the Utilities should have put in one new 52 week high and more importantly they should have done it before the industrials and or the transports. As both the transports and the utilities have not put in new highs we have what amounts to a double non confirmation signal. This suggests high probability of the Dow suffering a big correction.
If we examine the 20 stocks that make up this average we find that at least 10 of 20 stocks have not put in new highs. The stocks are BNI, AMR, LUV, UNP, CAL, EXPD, GMT, JBLU, NSC, and OSG. The index is therefore, being carried higher by only 10 stocks.
Finally, in the early stages of the rally total volume traded surged to and past the 7 billion mark several times but not one single high took place on even 7 billion shares of volume. In fact, since the 17th of Sept total volume on the NYSE has not even once reached the 7 billion mark.
The 3 charts clearly illustrate the divergence between the Dow industrials, the Dow transports and utilities; the Dow has put in a series of new 52 week highs, while the transports and utilities are struggling to get there. Prudence and caution are warranted now and traders should think twice before jumping into the markets.
Now let's contrast this performance with Gold, the shiny yellow.
After trading sideways for a period of almost 3 years in a tight channel formation (range of 240-300), Gold blasted out of this formation with a fury and has never looked back since. In fact, it has put in a new 52 week high every single year since 2002; a clear illustration of the strength driving this market. The Dow, on the other hand, after putting in what amounted to a fake new high in 2007 has done nothing and in 2008 it just snapped and cracked like a dead twig; the actual high was put in 2001 when adjusted for the stronger the dollar the Dow traded as high as 14660. The Full article can be found here Dow 14660 has come and gone. Gold also pulled back very strongly in 2008, but has since made up all the lost ground and then some more as it went on to put in several new all time highs. Another major difference is that Gold has been trading above its old 1980 highs for roughly 2 years minus the small brief dip in 2008, while the Dow in real terms never did trade past its old high if the real high it put back in April 2001 is taken into consideration. When adjusted for the stronger dollar the Dow traded as described in the above article to 14660 before pulling back.
What does this mean to investors?
Gold has more than over-compensated for the massive drop in the value of the dollar, while the Dow is struggling to just break even. From its lows of roughly 240, gold is up over 333%, while the Dow in the same time frame (assuming that the Low is 7200, which was set in Oct, 2002) is up only a miserable 33%. This clearly indicates that Gold was and continues to be a far better place for investors to park their money in. Looking at the above chart we note that Gold is trying to establish a new channel formation that ranges from 900-1020. As long as 1020 is not taken out on a weekly basis, Gold has the potential to trade all the way up to the 1100-1150 ranges before pulling back. However, taking the intermediate time frame perspective Gold is due for some pull back and could test the 900 ranges. Investors who have no position in Gold should use any strong pull back to add to or open new positions -- for this might be the last time that Gold trades below 1000. Perhaps its time to question which of these two investments is the true relic?
The young man knows the rules, but the old man knows the exceptions.
Oliver Wendell Holmes
All charts provided courtesy of www.prophet.net
© 2009 Sol Palha
30 October 2009
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