Thierry Martin
05-31-2007, 06:24 PM
"Can Divergences Tell You When to Stick a Fork in the Stock Market?"
(first published July 2006)
by: James Flanagan
website: http://www.gannglobal.com (http://www.gannglobal.com?img=105&kbid=1196)
= = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = =
Former New York Yankee great Yogi Berra is also legendary for his famous logic-defying quotations, including such gems as, "When you come to a fork in the road, take it," which became the title of a 2001 book of "Inspiration and Wisdom" from the holder of 10 World Series rings. But if your playing field is the stock market, can the advice of the 15-time all-star and 3-time MVP, who recently turned 81, help you catch the next major move?
A mere glance at the latest averages reveals a stock market rife with divergences. The venerable Dow Jones Industrials climbed to a 6-year high of 11642.65 on May 10, 2006, a stone's throw from the record close of 11722.98 on January 14, 2000, before getting knocked off their lofty perch by the usual suspects (fears of inflation and rising interest rates). Meanwhile, indices of smaller or more economically sensitive stocks had regularly hit records for months, riding the coattails of a booming global economy. Going into the 4 th of July, the Dow Jones Transportation Average had rebounded to stand less than half a percent off its high just under the 5000 level. And the Dow had erased most of an 8% sell-off to climb back within 500 points of its record. You wouldn't know it, though, by looking at various measures of large-capitalization stocks dragged lower by a heavy weighting in technology and telecom shares after their historic peaks in early 2000. The benchmark S&P 500 has yet to approach its old top. The NASDAQ Composite remains at well under half its peak level. And despite easily more than doubling from its October 2002 bear market low by early this year, the tech-heavy NASDAQ 100 stands at less than a third of its March 27, 2000 record.
The Dow Theory
In a prescient Wall Street Journal article (reprinted from Barron's) titled, "A Turn in the Tide," that appeared on the eve of the 1929 stock market crash, William Peter Hamilton wrote, "The twenty railroad stocks on Wednesday, October 23, confirmed a bearish indication given by the industrials two days before. Together the averages gave the signal for a bear market in stocks."
The respective back-to-back declines of 12.8% and 11.7% in the Dow Jones Industrials that followed on Black Monday and Black Tuesday, October 28-29, 1929, were by far the largest to date and still rank as the 2 nd- and 3 rd-worst days in Wall Street history.
Hamilton assumed editorship of the Journal from co-founder Charles Dow when the latter died in 1902, and wrote a series of editorials in which he developed and refined his predecessor's work until his own death in November 1929. Charles Dow may have been too modest to name the methodology he originated after himself, but in 1932 Robert Rhea reviewed 3 decades worth of articles by Dow and Hamilton before writing a book called The Dow Theory.
A couple of years after that, Alfred Cowles, the businessman and econometrician whose Cowles Commission would later calculate and publish monthly averages for a number of S&P indexes dating back to the beginning of 1871, turned his attention to Dow Theory. In a seminal 1934 study, Cowles appeared to debunk the popular theory when he reported that its practitioners would have realized only a 12% annualized total return vs. over 15% obtained by adherence to a simple buy-and-hold policy. Cowles' research included only data from 1903 to 1929, an inordinately bullish 26-year period -- industrial stocks established their low for the century in 1903, and by 1929 soared to previously unimaginable heights that would not be seen again for 25 years. Nevertheless, his conclusions formed an early basis for the Efficient Market Hypothesis. The late Ben Graham, in chapter one of his classic stock market tome The Intelligent Investor, seemingly pounded another nail into the Dow Theory's coffin when he lamented that the technique achieved "splendid results for 1897-1933" but "much more questionable performance since 1934."
Decades passed, and then in August 1998 a trio of academics (Stephen Brown of NYU, and William Goetzmann and Alok Kumar of Yale) released a blockbuster study published in the prestigious Journal of Finance in which they applied modern statistical techniques to reveal that heeding the signals given by Dow Theory actually beat passive investing on a risk-adjusted basis during the interval analyzed by Cowles. Furthermore, they extracted the principles elucidated by Hamilton in his editorials and, using state-of-the-art artificial intelligence software, tested them "out of sample." They found the Dow Theory outperformed buy-and-hold by about 2% a year from 1929 to 1998 with a third less volatility, despite lagging the market by 2.6% per annum after 1980, when the stock market staged its greatest long-term advance in history. Dow Theory demonstrated its greatest relative value in bearish decades, like the 1930s and 1970s.
How is it that perhaps the oldest market-timing strategy could remain so effective for so long?
A central tenet of the Dow Theory holds that the averages - originally the Dow Industrials and Dow Railroads - must confirm one another for a buy or sell signal to be considered valid. If one average makes a new high and the other doesn't follow suit reasonably soon thereafter, it could spell big trouble. This wasn't a problem during most of the roaring 1980s and 1990s. From late 1980 until its final top in January 2000, the DJIA never went as long as 2 full years without hitting a record high and Dow Jones Transportation Average, which replaced the Rails in 1970, exceeded that timespan only once - in the aftermath of the failed leveraged buyout of UAL that whacked the Dow for nearly a 7% loss on October 13, 1989 in the so-called "mini-crash."
The stock market has changed radically since the origination of the Dow Theory, and the economy has broadened significantly. Even with its expansion to include airlines, trucking and shipping concerns in addition to railroads, the Dow Jones Transportation Average measures only one of many vital modern business sectors. But its greater economic sensitivity and the energy- and labor-intensiveness of its components, particularly the airlines, makes the DJTA a nice complement to today's blue chips.
Dow Jones added a utilities average in 1929, and whole slew of specialized and competing indices have proliferated through the years to reflect the growth of American industry. Still, when an important business segment - as measured by its specific index - lags noticeably behind, it can become cause for deep concern. To see what we mean, let's look back at some major stock market all-time highs marked by glaring divergences between key indices.
= = = = = = = = = = = = = = = = = = = = = = = = = = =
Past Divergences at Major All-Time Highs
= = = = = = = = = = = = = = = = = = = = = = = = = = =
1899:
The original Dow Jones Industrial Average, in only its 4 th year of existence and comprised of 12 stocks, hits a new high in September just above an April peak that led to a spring correction. Industrial stocks had emerged as speculative darlings thanks to a great wave of trust formations, and the combined value of mergers in first 2 months of 1899 exceeded the total for all of 1898. As a result, the DJIA had gained 173% from the bear market low of August 8, 1896, vs. only as much as 108% for the Rails. The Dow Railroad Average stalls less than 2% below its April high, but speculative favorites bear the brunt of the selling that follows. The Rails end their correction before Christmas, but the DJIA loses 32% in over a year.
= = = = = = = = = = = = = = = = = = = = = = = = = = =
1901:
Excitement over financier J.P. Morgan's formation of U.S. Steel, born as America's first billion-dollar corporation, lifts the Industrial Average to a marginal record on June 17. By the time a 6-year bull market in the Railroads concludes in September 1902, however, the DJIA is nowhere near its high. In the subsequent "Rich Man's Panic", so called because it devastates trust barons and their stocks, the Rails fall over 31% and Industrials plunge a whopping 46%. U.S. Steel would soon eliminate its dividend.
= = = = = = = = = = = = = = = = = = = = = = = = = = =
1916:
The DJIA more than doubles from the lows of late 1914, when the New York Stock Exchange reopened following its closure upon the outbreak of WWI. The Industrial Average's 82% gain in 1915 remains its greatest in any calendar year. But the Rails peak 19% beneath their all-time high established over a decade earlier, in January 1906. The DJIA slides more than 40% before the end of 1917.
= = = = = = = = = = = = = = = = = = = = = = = = = = =
1919:
Industrial stocks recoup losses sustained in the 1917 bear market and hit new highs, but fail to go much further as the divergence with the Rails only worsens. Railroads remained under control of U.S. Railroad Administration (USRA) following their seizure in December 1917. The Dow Jones Railroad Average tops in November 1918, almost a full year before the Industrials, at a level far short of even its 1916 peak. The deflationary 1919-21 bear market slammed the DJIA for a 47% loss and sent the Rails to lows not seen since 1898, during the Spanish-American War.
= = = = = = = = = = = = = = = = = = = = = = = = = = =
1956:
The Dow Industrials took over 25 years to surpass their 1929 high, and the Rails couldn't do so until the 1960s. But the main divergence in 1956 involved the DJIA and the S&P, by now a much more relevant market metric than the Railroads or any sector index. The S&P reached a new all-time high on August 2, but the Dow topped a mere fraction of a point under its April 6 high. In July 1957 the Dow made a 3 rd slightly lower top, then stocks broke badly, with the DJIA falling 19% and the S&P suffering a 22% bear market loss by October.
= = = = = = = = = = = = = = = = = = = = = = = = = = =
1960:
The Dow surged past its August 1959 top at the beginning of the year while the S&P came up short. The DJIA slid over 17% by late October.
= = = = = = = = = = = = = = = = = = = = = = = = = = =
1968:
Everyone was getting rich in obscure "concept stocks," franchising and computer leasing companies. All broad indices soared to record highs. Except for the stodgy Dow Industrials, now scorned as an anachronism, which topped almost exactly 1% below their February 1966 peak. The rate-sensitive Dow Jones Utilities Average turned down even sooner, in April 1965, before plummeting 64% in a near 9-1/2-year bear market, as inflation and interest rates took off in earnest. When the market finally bottomed on May 26, 1970, the Dow had lost 37%, and the S&P fell 36%.
= = = = = = = = = = = = = = = = = = = = = = = = = = =
1973:
Too many chiefs and not enough Indians. The situation this time was the opposite of 1968. A limited group of big company growth stocks became favorites and propelled the Dow and S&P 500 to new records in early January. Known as "The Nifty 50" or "one-decision stocks, because once you bought them you would supposedly never encounter a valid reason to sell, they led the market higher as breadth progressively narrowed. The Dow Transports, successor to the Rails Average, failed to match their prior bull market peak before turning lower after April 1972. The contrast between blue chips and smaller stocks was striking, as evidenced by the Value Line Composite, an unweighted geometric average of 1700 stocks, which never approached its 1968 top, on the way to a 75% loss in a 6-year bear market that persisted into late 1974. By then, the S&P was down 48% and the DJIA fell 45% in what still ranks as its worst bear market since the 1930s.
= = = = = = = = = = = = = = = = = = = = = = = = = = =
1981:
An increasingly heavy weighting in surging energy stocks as the price of crude oil hit its all-time inflation-adjusted high in November 1980 enabled the S&P to establish a new record. The Transports continued to rise well into previously uncharted territory as late as April 1981. But the Dow Industrials topped that month less than 3% beneath their January 1973 peak. The resulting bear market trimmed the DJIA by 24% and knocked 27% off the S&P at the August 12, 1982 low.
= = = = = = = = = = = = = = = = = = = = = = = = = = =
1990:
The Transportation Average couldn't recover from the 1989 collapse of the LBO of UAL. The NASDAQ Composite also topped in 1989. New highs in the DJIA met with aggressive selling - a correction in January 1990, and a full-fledged bear market in July-October, when the Industrials lost over 21%.
= = = = = = = = = = = = = = = = = = = = = = = = = = =
2000:
Never have the DJIA and NASDAQ decoupled to such an extent. The Dow peaked on January 14 and couldn't get within 600 points of its record in March, when the NASDAQ Composite topped after an incredible 15-fold increase in less than 9 years. The capitalization-weighted S&P, of which tech and telecom stocks by now accounted for 35% due to their rapid appreciation, largely tracked the bigger NASDAQ issues. A long bear market then chopped 38% off the Dow and cut the S&P virtually in half. Those losses paled in comparison to the woes of technology stock investors, however. The NASDAQ Composite and large-cap NASDAQ 100 would lose 78% and 83%, respectively, by the time they bottomed in October 2002.
= = = = = = = = = = = = =
The Current Market
= = = = = = = = = = = = =
If the current stock market, with the Dow mired around the 11,000 mark, turns lower, the DJIA will fail to follow the Transports into record ground. But even if both averages satisfy Dow Theorists by moving to fresh highs in unison, the broader S&P would likely still have a lot of catching up to do, an indication of the lasting weakness in much of the market since 2000. Meanwhile, larger technology companies, still a major segment of the economy, continue to lag hopelessly behind a market led by cyclical stocks and commodity producers.
History shows that narrow leadership or the failure of important averages to confirm can pose a grave threat to the stock market. When the impact is finally felt, the public may discover, as Yogi Berra might say, "If investors don't want to buy stocks, there's nothing anyone can do to stop them."
Take a few minutes to check out the Complete Forecasting Service:
http://www.gannglobal.com (http://www.gannglobal.com?img=105&kbid=1196)
= = = = = = = = = = = = = = = = = = = = = = = = = = = =
About the Author:
James Flanagan is the president and founder of Gann Global Financial. In 1978, while majoring in economics at Claremont McKenna College, he acquired his first book written by W.D. Gann, "How to Make Profits Trading in Commodities." This set in motion his passion to validate the claims of this early pioneer of market psychology and technical analysis. In April 1990, he launched his first newsletter Past Present Futures which has been in continuous publication since that time. James Flanagan oversees all of the research and research development at GannGlobal.com: http://www.gannglobal.com (http://www.gannglobal.com?img=105&kbid=1196)
= = = = = = = = = = = = = = = = = = = = = = = = = = = =
(first published July 2006)
by: James Flanagan
website: http://www.gannglobal.com (http://www.gannglobal.com?img=105&kbid=1196)
= = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = =
Former New York Yankee great Yogi Berra is also legendary for his famous logic-defying quotations, including such gems as, "When you come to a fork in the road, take it," which became the title of a 2001 book of "Inspiration and Wisdom" from the holder of 10 World Series rings. But if your playing field is the stock market, can the advice of the 15-time all-star and 3-time MVP, who recently turned 81, help you catch the next major move?
A mere glance at the latest averages reveals a stock market rife with divergences. The venerable Dow Jones Industrials climbed to a 6-year high of 11642.65 on May 10, 2006, a stone's throw from the record close of 11722.98 on January 14, 2000, before getting knocked off their lofty perch by the usual suspects (fears of inflation and rising interest rates). Meanwhile, indices of smaller or more economically sensitive stocks had regularly hit records for months, riding the coattails of a booming global economy. Going into the 4 th of July, the Dow Jones Transportation Average had rebounded to stand less than half a percent off its high just under the 5000 level. And the Dow had erased most of an 8% sell-off to climb back within 500 points of its record. You wouldn't know it, though, by looking at various measures of large-capitalization stocks dragged lower by a heavy weighting in technology and telecom shares after their historic peaks in early 2000. The benchmark S&P 500 has yet to approach its old top. The NASDAQ Composite remains at well under half its peak level. And despite easily more than doubling from its October 2002 bear market low by early this year, the tech-heavy NASDAQ 100 stands at less than a third of its March 27, 2000 record.
The Dow Theory
In a prescient Wall Street Journal article (reprinted from Barron's) titled, "A Turn in the Tide," that appeared on the eve of the 1929 stock market crash, William Peter Hamilton wrote, "The twenty railroad stocks on Wednesday, October 23, confirmed a bearish indication given by the industrials two days before. Together the averages gave the signal for a bear market in stocks."
The respective back-to-back declines of 12.8% and 11.7% in the Dow Jones Industrials that followed on Black Monday and Black Tuesday, October 28-29, 1929, were by far the largest to date and still rank as the 2 nd- and 3 rd-worst days in Wall Street history.
Hamilton assumed editorship of the Journal from co-founder Charles Dow when the latter died in 1902, and wrote a series of editorials in which he developed and refined his predecessor's work until his own death in November 1929. Charles Dow may have been too modest to name the methodology he originated after himself, but in 1932 Robert Rhea reviewed 3 decades worth of articles by Dow and Hamilton before writing a book called The Dow Theory.
A couple of years after that, Alfred Cowles, the businessman and econometrician whose Cowles Commission would later calculate and publish monthly averages for a number of S&P indexes dating back to the beginning of 1871, turned his attention to Dow Theory. In a seminal 1934 study, Cowles appeared to debunk the popular theory when he reported that its practitioners would have realized only a 12% annualized total return vs. over 15% obtained by adherence to a simple buy-and-hold policy. Cowles' research included only data from 1903 to 1929, an inordinately bullish 26-year period -- industrial stocks established their low for the century in 1903, and by 1929 soared to previously unimaginable heights that would not be seen again for 25 years. Nevertheless, his conclusions formed an early basis for the Efficient Market Hypothesis. The late Ben Graham, in chapter one of his classic stock market tome The Intelligent Investor, seemingly pounded another nail into the Dow Theory's coffin when he lamented that the technique achieved "splendid results for 1897-1933" but "much more questionable performance since 1934."
Decades passed, and then in August 1998 a trio of academics (Stephen Brown of NYU, and William Goetzmann and Alok Kumar of Yale) released a blockbuster study published in the prestigious Journal of Finance in which they applied modern statistical techniques to reveal that heeding the signals given by Dow Theory actually beat passive investing on a risk-adjusted basis during the interval analyzed by Cowles. Furthermore, they extracted the principles elucidated by Hamilton in his editorials and, using state-of-the-art artificial intelligence software, tested them "out of sample." They found the Dow Theory outperformed buy-and-hold by about 2% a year from 1929 to 1998 with a third less volatility, despite lagging the market by 2.6% per annum after 1980, when the stock market staged its greatest long-term advance in history. Dow Theory demonstrated its greatest relative value in bearish decades, like the 1930s and 1970s.
How is it that perhaps the oldest market-timing strategy could remain so effective for so long?
A central tenet of the Dow Theory holds that the averages - originally the Dow Industrials and Dow Railroads - must confirm one another for a buy or sell signal to be considered valid. If one average makes a new high and the other doesn't follow suit reasonably soon thereafter, it could spell big trouble. This wasn't a problem during most of the roaring 1980s and 1990s. From late 1980 until its final top in January 2000, the DJIA never went as long as 2 full years without hitting a record high and Dow Jones Transportation Average, which replaced the Rails in 1970, exceeded that timespan only once - in the aftermath of the failed leveraged buyout of UAL that whacked the Dow for nearly a 7% loss on October 13, 1989 in the so-called "mini-crash."
The stock market has changed radically since the origination of the Dow Theory, and the economy has broadened significantly. Even with its expansion to include airlines, trucking and shipping concerns in addition to railroads, the Dow Jones Transportation Average measures only one of many vital modern business sectors. But its greater economic sensitivity and the energy- and labor-intensiveness of its components, particularly the airlines, makes the DJTA a nice complement to today's blue chips.
Dow Jones added a utilities average in 1929, and whole slew of specialized and competing indices have proliferated through the years to reflect the growth of American industry. Still, when an important business segment - as measured by its specific index - lags noticeably behind, it can become cause for deep concern. To see what we mean, let's look back at some major stock market all-time highs marked by glaring divergences between key indices.
= = = = = = = = = = = = = = = = = = = = = = = = = = =
Past Divergences at Major All-Time Highs
= = = = = = = = = = = = = = = = = = = = = = = = = = =
1899:
The original Dow Jones Industrial Average, in only its 4 th year of existence and comprised of 12 stocks, hits a new high in September just above an April peak that led to a spring correction. Industrial stocks had emerged as speculative darlings thanks to a great wave of trust formations, and the combined value of mergers in first 2 months of 1899 exceeded the total for all of 1898. As a result, the DJIA had gained 173% from the bear market low of August 8, 1896, vs. only as much as 108% for the Rails. The Dow Railroad Average stalls less than 2% below its April high, but speculative favorites bear the brunt of the selling that follows. The Rails end their correction before Christmas, but the DJIA loses 32% in over a year.
= = = = = = = = = = = = = = = = = = = = = = = = = = =
1901:
Excitement over financier J.P. Morgan's formation of U.S. Steel, born as America's first billion-dollar corporation, lifts the Industrial Average to a marginal record on June 17. By the time a 6-year bull market in the Railroads concludes in September 1902, however, the DJIA is nowhere near its high. In the subsequent "Rich Man's Panic", so called because it devastates trust barons and their stocks, the Rails fall over 31% and Industrials plunge a whopping 46%. U.S. Steel would soon eliminate its dividend.
= = = = = = = = = = = = = = = = = = = = = = = = = = =
1916:
The DJIA more than doubles from the lows of late 1914, when the New York Stock Exchange reopened following its closure upon the outbreak of WWI. The Industrial Average's 82% gain in 1915 remains its greatest in any calendar year. But the Rails peak 19% beneath their all-time high established over a decade earlier, in January 1906. The DJIA slides more than 40% before the end of 1917.
= = = = = = = = = = = = = = = = = = = = = = = = = = =
1919:
Industrial stocks recoup losses sustained in the 1917 bear market and hit new highs, but fail to go much further as the divergence with the Rails only worsens. Railroads remained under control of U.S. Railroad Administration (USRA) following their seizure in December 1917. The Dow Jones Railroad Average tops in November 1918, almost a full year before the Industrials, at a level far short of even its 1916 peak. The deflationary 1919-21 bear market slammed the DJIA for a 47% loss and sent the Rails to lows not seen since 1898, during the Spanish-American War.
= = = = = = = = = = = = = = = = = = = = = = = = = = =
1956:
The Dow Industrials took over 25 years to surpass their 1929 high, and the Rails couldn't do so until the 1960s. But the main divergence in 1956 involved the DJIA and the S&P, by now a much more relevant market metric than the Railroads or any sector index. The S&P reached a new all-time high on August 2, but the Dow topped a mere fraction of a point under its April 6 high. In July 1957 the Dow made a 3 rd slightly lower top, then stocks broke badly, with the DJIA falling 19% and the S&P suffering a 22% bear market loss by October.
= = = = = = = = = = = = = = = = = = = = = = = = = = =
1960:
The Dow surged past its August 1959 top at the beginning of the year while the S&P came up short. The DJIA slid over 17% by late October.
= = = = = = = = = = = = = = = = = = = = = = = = = = =
1968:
Everyone was getting rich in obscure "concept stocks," franchising and computer leasing companies. All broad indices soared to record highs. Except for the stodgy Dow Industrials, now scorned as an anachronism, which topped almost exactly 1% below their February 1966 peak. The rate-sensitive Dow Jones Utilities Average turned down even sooner, in April 1965, before plummeting 64% in a near 9-1/2-year bear market, as inflation and interest rates took off in earnest. When the market finally bottomed on May 26, 1970, the Dow had lost 37%, and the S&P fell 36%.
= = = = = = = = = = = = = = = = = = = = = = = = = = =
1973:
Too many chiefs and not enough Indians. The situation this time was the opposite of 1968. A limited group of big company growth stocks became favorites and propelled the Dow and S&P 500 to new records in early January. Known as "The Nifty 50" or "one-decision stocks, because once you bought them you would supposedly never encounter a valid reason to sell, they led the market higher as breadth progressively narrowed. The Dow Transports, successor to the Rails Average, failed to match their prior bull market peak before turning lower after April 1972. The contrast between blue chips and smaller stocks was striking, as evidenced by the Value Line Composite, an unweighted geometric average of 1700 stocks, which never approached its 1968 top, on the way to a 75% loss in a 6-year bear market that persisted into late 1974. By then, the S&P was down 48% and the DJIA fell 45% in what still ranks as its worst bear market since the 1930s.
= = = = = = = = = = = = = = = = = = = = = = = = = = =
1981:
An increasingly heavy weighting in surging energy stocks as the price of crude oil hit its all-time inflation-adjusted high in November 1980 enabled the S&P to establish a new record. The Transports continued to rise well into previously uncharted territory as late as April 1981. But the Dow Industrials topped that month less than 3% beneath their January 1973 peak. The resulting bear market trimmed the DJIA by 24% and knocked 27% off the S&P at the August 12, 1982 low.
= = = = = = = = = = = = = = = = = = = = = = = = = = =
1990:
The Transportation Average couldn't recover from the 1989 collapse of the LBO of UAL. The NASDAQ Composite also topped in 1989. New highs in the DJIA met with aggressive selling - a correction in January 1990, and a full-fledged bear market in July-October, when the Industrials lost over 21%.
= = = = = = = = = = = = = = = = = = = = = = = = = = =
2000:
Never have the DJIA and NASDAQ decoupled to such an extent. The Dow peaked on January 14 and couldn't get within 600 points of its record in March, when the NASDAQ Composite topped after an incredible 15-fold increase in less than 9 years. The capitalization-weighted S&P, of which tech and telecom stocks by now accounted for 35% due to their rapid appreciation, largely tracked the bigger NASDAQ issues. A long bear market then chopped 38% off the Dow and cut the S&P virtually in half. Those losses paled in comparison to the woes of technology stock investors, however. The NASDAQ Composite and large-cap NASDAQ 100 would lose 78% and 83%, respectively, by the time they bottomed in October 2002.
= = = = = = = = = = = = =
The Current Market
= = = = = = = = = = = = =
If the current stock market, with the Dow mired around the 11,000 mark, turns lower, the DJIA will fail to follow the Transports into record ground. But even if both averages satisfy Dow Theorists by moving to fresh highs in unison, the broader S&P would likely still have a lot of catching up to do, an indication of the lasting weakness in much of the market since 2000. Meanwhile, larger technology companies, still a major segment of the economy, continue to lag hopelessly behind a market led by cyclical stocks and commodity producers.
History shows that narrow leadership or the failure of important averages to confirm can pose a grave threat to the stock market. When the impact is finally felt, the public may discover, as Yogi Berra might say, "If investors don't want to buy stocks, there's nothing anyone can do to stop them."
Take a few minutes to check out the Complete Forecasting Service:
http://www.gannglobal.com (http://www.gannglobal.com?img=105&kbid=1196)
= = = = = = = = = = = = = = = = = = = = = = = = = = = =
About the Author:
James Flanagan is the president and founder of Gann Global Financial. In 1978, while majoring in economics at Claremont McKenna College, he acquired his first book written by W.D. Gann, "How to Make Profits Trading in Commodities." This set in motion his passion to validate the claims of this early pioneer of market psychology and technical analysis. In April 1990, he launched his first newsletter Past Present Futures which has been in continuous publication since that time. James Flanagan oversees all of the research and research development at GannGlobal.com: http://www.gannglobal.com (http://www.gannglobal.com?img=105&kbid=1196)
= = = = = = = = = = = = = = = = = = = = = = = = = = = =