Everyone is now into Dow Theory

One tenant of Dow Theory is that stock market averages must confirm each other and so we need the Dow Transports to confirm a new high or low posted by the Dow Industrials. Keep in mind that Dow did not state a time period for the confirmation to occur. According the Wikipedia, Charles H. Dow stated a bull market in industrials could not occur unless the railway average rallied as well, usually first. According to this logic, if manufacturers' profits are rising, it follows that they are producing more. If they produce more, then they have to ship more goods to consumers. Hence, if an investor is looking for signs of health in manufacturers, he or she should look at the performance of the companies that ship the output of them to market, the railroads. The two averages should be moving in the same direction. When the performance of the averages diverge it is a warning that change is in the air.

Today most of us know – thanks to the business media that so far this year the Transports have not followed the Industrials on to new 52-week highs. Now back in Dow’s time the Transports did not contain truckers and airline stocks and today it is not unusual to get performance divergence between the rails, the truckers and the airlines. A look at two important railroads make me wonder what all the fuss is about – both are still in linear up trends. Keep an eye on FDX and UPS to see if they can recover back to their 40 week MAs over the next several weeks. If that does not occur then I may have some concern

Francis Horodelski is a bear

One of my favourite BNN personalities is Frances Horodelski who according to BNN has been following markets for over 30 years, including 25 years with two of Canada's largest investment dealers. Her career has spanned research, portfolio advice, investment banking and international strategy. She also holds the designation of Chartered Financial Analyst.

Anyway aside from all that I just like her common sense delivery – but I think the bearish guests have seduced her into the bearish camp. I do know Francis respects technical analysis and so I am posting two important charts that clearly deliver a bullish spin.

The first chart is the weekly iShares TLT which is a measure of fear – the higher the price, the greater the fear and so we need to see the TLT to roll over to confirm a shift to equities. Our chart displays a bearish rising wedge or diagonal triangle. The rising wedge is rare and very deadly – this is the only pattern that when identified I will sell into. 

The second chart needs little explanation – the NYSE advance / decline line which is a measure the breadth of a stock market advance or decline. The AD line tracks the net difference between advancing and declining issues. This study has been around for generations and like point & figure is ignored by the younger technical analysts who prefer the flashy MACD and Stochastic lines. However this little used study usually leads the price and so when the A/D line beaks to all time highs – I get impressed

 

The next big thing

The next big thing means that when discovered early a patient long term investor could out perform the broader stock indices. Some past next big things were technology 1980 to 2000 and commodities 2001 to 2011.

Aerospace is a next big thing contender with U.S. PowerShares Aerospace & Defense (PPA), Honeywell International Inc. (HON) and General Electric Company (GE) pushing to new 52-week highs and perhaps with some – all time highs. Some small Canadian aerospace related names, Heroux-Devtek Inc. (HRX) and Magellan Aerospace Corporation (MAL) were also printing new 52-week highs. The Canadian laggards remain CAE and Bombardier. Aerospace is currently under-owned and devoid of investment sheep. I need to re-visit this group in a few weeks. 

Another “next big thing” contender is the lumber space with names like Acadian Timber Corp. ADN Ainsworth Lumber Co. Ltd. ANS, International Forest Products Limited (IFP.A), West Fraser Timber Co. Ltd. (WFT), Canfor Corporation (CFP), Norbord Inc. (NBD), Weyerhaeuser Co. (WY) and Rayonier Inc. (RYN) all printing recent new 52-week highs.

I did a Google on lumber seasonality and found on a site called Equity Clock and I quote “Lumber Futures Continuous Contract Seasonality, Analysis has revealed that with a buy date of October 23 and a sell date of November 19, investors have benefited from a total return of 45.44% over the last 10 years. This scenario has shown positive results in 8 of those periods”.

If you do some Bill Clinton arithmetic you find that a 10 year 45.44% total return works out to only a 3.78% annualized return – clearly not worth all the trading work . We know lumber prices have declined 70% from a May 2004 peak to a March 2009 low and then subsequently doubled in price from a deeply over-sold condition. The 2009 low of Weyerhaeuser seems to be positioned where the gold miners were back in mid 2001.