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The Dow Stands Alone?

CAMS Weekly Views from the Corner – Week Ending 8/4/2017

August 7, 2017

Dow Theory made very simple:  Transport Materials – Create Products – Transport Finished Products.

Excerpt Weekly View – Blue Line/Red Line Divergence May 22, 2017

Our recent Weekly View’s have developed a bit of a theme with watching for leadership areas within the stock market landscape.  We are focused on this because we have had such poor leadership in the stock market as the summer has unfolded.  Interestingly, this has seemingly gone largely unnoticed in the everyday narrative of the stock market with the Dow Jones Industrial Average (DJIA) posting higher highs consistently.

It is right here where our concern is manifested.  That is, we have a well known index that is performing basically by itself.  Furthermore, within said index there are a limited number of stocks that are grading out as leaders.  With this, we have a well known index that is not performing on all cylinders and yet its headline result infers a stock market that is strong and vibrant across the board.

This past week, as the DJIA moved higher every day, the Russell 2000 Index (key index for small size companies) went lower nearly every day.  Importantly, the small size companies had been on our concern list for yet another area that appeared to be failing its leadership attempt.  That space is now crossed off with its performance failure.


INDU - 8.7.17

Click For Larger View: http://schrts.co/TvWZHJ

Another area that was attempting to lead the way higher was the Dow Jones Transport Average.  This along with the Dow Jones Industrials speaks to our header quote of Dow Theory.  The central idea here is companies transporting goods should generally be in sync trend wise with companies that are making the goods to transport.  When they diverge away from one another there is a developing disconnect and should be monitored as a concern.

The chart above depicts both together for the last twelve months.  On the upper right section of the chart the red box highlights the diverging trends of the two.  Since the front part of July the Transports (Blue line) has gone nearly straight down while the Industrials (Red line) has gone nearly straight up.  This is called a negative divergence as the two trend away from one another.  Dow Theory offers this as a concern as they are completely out of sync.

Dow Theory aside and through the lens of our leadership watch the Transports leadership failure is yet another troubling development.  The small companies mentioned previously along with the Transports need to reclaim their strength quickly.  If not, and if these types of “lack of leadership” developments continue, it will spell concerns for stock market performance.

I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis

Portfolio Manager, CAMS Spectrum Portfolio

Footnote:

H&UP’s is a quick summation of a rating system for SPX9 (abbreviation encompassing 9 Sectors of the S&P 500 with 107 sub-groups within those 9 sectors) that quickly references the percentage that is deemed healthy and higher (H&UP).  This comes from the proprietary “V-NN” ranking system that is composed of 4 ratings which are “V-H-N-or NN”.  A “V” or an “H” is a positive or constructive rank for said sector or sub-group within the sectors.

This commentary is presented only to provide perspectives on investment strategies and opportunities. The material contains opinions of the author, which are subject to markets change without notice. Statements concerning financial market trends are based on current market conditions which fluctuate. References to specific securities and issuers are for descriptive purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. There is no guarantee that any investment strategy will work under all market conditions. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. PERFORMANCE IS NOT GUARANTEED AND LOSSES CAN OCCUR WITH ANY INVESTMENT STRATEGY.

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