Opinion: The Dow will keep trending down unless these two things happen
Two top Dow Theory strategists have turned bearish on stocks
CHAPEL HILL, N.C. (MarketWatch) — The stock market's major trend is down, according to the oldest stock market timing system that remains in widespread use today.
I'm referring to the Dow Theory, whose primary author was William Peter Hamilton, editor of the Wall Street Journal in the early decades of the last century. For many years I have been monitoring the performance of a pair of Dow Theory-oriented investment newsletters, and though they have not always agreed on how to interpret Hamilton's rules, in the current case they do.
The case for small-cap stocks, closed-end funds
(6:47)Jonathan Beukelman, a wealth manager at UBS, sees opportunities in domestic stocks and oversold closed-end funds, and is also adding exposure to European stocks.
Those two Dow theorists are Jack Schannep, editor of TheDowTheory.com, and Richard Moroney, editor of Dow Theory Forecasts. On Schannep's interpretation, the Dow Theory flashed a major bear market "sell" signal in mid-December; Moroney issued a similar declaration three weeks later, in early January.
Though the devil is in the details when putting Hamilton's system into practice, the Dow Theory in general terms holds that the stock market must jump over three hoops to reverse itself and flash a "buy" signal:
- . Both the Dow Jones Industrial Average DJIA, -0.03% and the Dow Jones Transportation Average DJT, -0.14% must undergo a significant rally after hitting new lows — significant both in terms of time and magnitude.
- . In their subsequent significant correction following the market's rally referred to in step 1, either one or both of those Dow averages must remain above the initial lows.
- . Both averages must then rise above their highs registered at the top of the rally referred to in step 1.
Both Schannep and Moroney agree that only the first of the three hurdles has been cleared — by the market's strong rally since its Feb. 11 low. They therefore are focusing intently on the market's recent weakness and whether the Feb. 11 lows will hold.
What are the chances that those lows will indeed hold and that a new Dow Theory "buy" signal is imminent? Schannep acknowledges that there is no shortage of factors on both sides of that question. One bullish factor, for example, is the surprisingly strong performance in recent weeks of the Dow Transports.
But Shannep quickly stresses: "We have learned time and again that it rarely pays off to anticipate such determinations, and that it is better to wait for an actual signal."
Until then, Schannep reminds Dow Theory followers: "Once in place, the primary trend is assumed to continue until definitely proven otherwise."
Moroney concludes that the market's recent "bounce-back rally proves little."
Posted by: sarah_oz@yahoo.com
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