Stocks retreated marginally from their highs of last week, but there’s no strong evidence to suggest the short-term bullish trend is over. Nonetheless, like a swarm of black flies buzzing around the back of your head, a few items are starting to make us nervous.
First and foremost, the Dow Transportation Index gave a pretty poor showing last week. It appears to have broken its short-term uptrend, and is less likely to confirm the recent highs in other market averages. (To recap: according to Dow Theory, no confirmation by transports = no sustained bull market.) Last summer, we predicted new highs in most averages, with the caveat that the transports needed to join the party. Since then, while most averages have indeed been enjoying new highs, the transports remain sitting in the parking lot, looking for an excuse to call it a night.
Of course, the transports could change their mind and decide to come in for at least one quick drink, just to be sociable. But until they hit a new high, we hold to our belief that the party hasn’t really got started.
We also have noticed some additional signs that the economy is weaker than we hoped. In addition to the recent drop in housing prices, unemployment insurance claims rose last Thursday. While they are nowhere near the level that would indicate a recession, they are the highest they’ve been in several months. This is another critical indicator, which we will keep a close eye on.Read more...
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