Serving Up a Black Eye?

Well, another week, another debate, more mixed signals and the seemingly inevitable crash I referred to last week finally came to pass…

Aaahh, scratch that. No crash… I did say color me skeptical at that time…and quite a bit more. Truth is that despite the myriad headwinds and legitimate reasons this market should turn tail and head south, I’ve been hesitant to buy into such a notion, primarily because price action ain’t pointing to such a move…just yet.

As explained in my last several posts and the newsletter, the broad indices have factored and discounted an awful lot of bad news… Given that simple fact, some (myself included) give great deference to the argument that the relative strength of the major indices is itself a signal the markets are looking ahead and forecasting the real possibility of better times.

Not for me to say or guess…I’m simply looking at price action, as is my norm. From that standpoint, the market does appear to be hinting at a northerly trek. But as any trader that’s been around for a good clip of time will tell ya, this is exactly the point where epic reversals occur.

Many unknowns to be sure, but what can be stated with confidence is the fact that the market has effectively held up remarkable well as its navigated some pretty serious minefields during what has traditionally been a difficult season—September through October. The INDU has basically side-winded in a relatively tight range—13,300 to 13,660—and presently sits near the top of that range.

Moreover, the INDU sits within spittin distance of its 2007 all-time high of 14,165. Since clearing its May high back in September—an event many interpreted as a buy signal in Dow Theor —hoards of bulls have predicted an assault on the all-time mark and consider recent activity as nothing more than consolidation before a new bull leg forms to set new highs.

On the flipside, there is a sizable group of traders who have remained leery of the long side of the market. While most admit that both the INDU and SPX are showing pretty decent strength, they sense something amiss below the surface. One of the chief standard-bearers of that group is Richard Russell, the founder and editor of the Dow Theory Letters.

Now it’s fair to say that Russell has been known to be a wee bit bearish over the years…Okay, maybe “wee bit” is a little understated….he’s called as recently as this year for a correction that will prove greater than any ever experienced. Now before you roll your eyes and label him a crackpot, it’s worth noting that he’s been publishing the DTL since ’58 and has seen just about everything…and certainly much more than just about any living participant in the market. And he’s proven right a pretty fair amount of the time…and not so right a fair amount as well.

This year in particular Russell has been sounding the alarm for a slew of legitimate reasons related to our debt structure, economy, market valuations, European and Chinese situations, etc. He actually instructed his clients to go to Gold early in the year.

More recent and relevant to our discussion is the fact he’s warned that the September upside break on the part of the Dow was a bogus buy trigger that would likely prove to be a trap for bulls. His primary reasoning was (and remains) the fact that the Dow Transports failed to top their highs from early in the year. Indeed, the Transport chart has been anything but reassuring, with a series of failed rallies and lower highs dating to early in the year.

Russell is not alone in his fretting over the failure of the transports to confirm the upside break on the part of the INDU—most Dow theorists prescribe to the same notion and many have voiced concerns this market may still decline sharply if confirmation doesn’t occur soon.

Well, whatever your thoughts on Russell and those likeminded, the fact is the Transports are starting to get interesting. After yet another nasty swoon in September, October has seen the group trade back up to challenge a strong downtrend-line that formed off the 2011 highs and has since held firmly to quash each attempted rally.

Might we simply be looking at another failed attempt this time around? Most certainly so… But there is an added element this time around that is worth noting—good ol’ Federal Express. The worldwide delivery company is considered by many to be a bell-weather on the global economy and markets. And it’s a major component of the Transports.

A quick gander at the map tells us that Fed Ex is suddenly looking rather froggy:

The company actually reported lousy numbers a month ago and took down their earnings forecast for 2012. Equally gloomy was the fact they cast a dark shadow on biz the world over in their forward forecast. The stock and the market as a whole dropped in the wake of their forecast. Since that time FDX has developed some serious legs and managed to break above a down-trendline dating to 2007—it’s now challenging nearer-term resistance.

If…big if…If FDX does manage an upside break, the Transports will surely go. This would be seen by lots of peeps as the long-awaited confirmation the U.S. broad indices are gonna take off. Factor the market- friendly months of November and December—voila, you have the makings of a year-ending party…at least in the eyes of the bulls.

So, what’s the takeaway? A whole bunch of “ifs.”

Then again, maybe there is crack of light in this tunnel. It’s worth leaving you with this little tidbit. Just yesterday Russell came out in his “site notes” talking bout the notion that the Dow Theory might be poised to take a “black eye.” He lamented that his call on the markets might well prove to be wrong; actually going so far as to admit that a set of proprietary indicators he’s long-used and trusted have signaled an upside move in the markets, despite the fact the Transports have failed to confirm a Dow buy signal.

What’s to make of all this? Dunno – but one can’t help but get the sense we are on the verge of something decisive…time will tell!

~LH