Heard in the Village: August 2009

Opinions were flying in the village this month. Rumor had it that Dow Theory Letters may have said there was a new Dow Theory buy signal. Dow Theory Forecast, July 27 issue, wrote, “While recent market action has been impressive, we would not view a breakout in the Dow Tranports above their May high as a bull-market signal under the Dow Theory.” They said both the Industrials and Transports had to reach “significant” highs for a new signal. They listed reasons why they disagreed.

  • General, significant corrections retrace 33% to 67% of the previous advance.
  • Significant corrections usually last three weeks to three months.
The current rally since March is long enough but it still fits the measures of a bear market rally. The Industrials need to go to 10,887 and the Transports need to go to 4341 before they break above a usual bear market rally. They stay bearish but they added, “Nothing says the Dow Theory must be used in an all or nothing fashion...we will continue to look for opportunities among individual stocks.” That was where a wide variety of opinions came in.

Many agreed with the reasons above while others went with the CNBC bull crowd. Others spoke their reasons why the market would not or should not be going up. One person brought up James Stacks Invest Tech Research’s , July 3, 2009 comments about listening to the market. He said he got into trouble investing when he “told” the market what it should be doing. That’s why he keeps asking himself, “Am I listening to the market?”. “Am I paying attention to the most important evidence?”

The villagers agreed with Stack because they learned long ago that if they disagreed with the market, they needed to find out why they were wrong. It may be more difficult today to find the reason with all the day trading noise but the markets reasons will eventually be shown. Don’t fight the tape; it is working now.

The villagers didn’t decide bull or bear. They decided to watch the evidence from the moving averages and new 52 week highs and lows. If the market turned negative, they could probably see it.

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