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Ominous Divergence Between Dow and Other Markets!

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    April 8, 2013

    The Dow and S&P 500 have continued to rally, reaching new record highs just three days ago, impressively ignoring the return of the euro-zone crisis and pile-up of negative economic reports. The Dow’s intra-day recovery yesterday from its initial collapse in response to the jobs report was another in a string of such impressive events.

    The Dow was down 172 points at its intraday low yesterday and recovered in the afternoon to close down just 40 points.


    That continues to be great for our Seasonal Timing Strategy which has been 100% invested in the DJIA index etf DIA since just after the November low.

    However, there are divergences from the Dow beginning to develop in the rest of the market, at least in the short-term charts, that could be another warning of an intermediate-term top being near.

    For instance, the DJ Transportation Average, and the small stock Russell 2000 index have both been in noticeable short-term declines back to their 50-day moving averages, even as the Dow and S&P 500 continued on to new highs.



    There’s an old-time observation about such developments.

    When the generals (the Dow stocks) continue to forge ahead but eventually look back and see the troops (the rest of the market) are no longer following but are in retreat, the generals soon give up the advance and fall back to join the troops in retreat.”

    Explaining why that happened so often in history I showed in my 1999 book Riding the Bear- How to Prosper in the Coming Bear, that in the old-days (before regulations were imposed to prevent such abuses), there was considerable evidence that near market tops a few key stocks in the 30-stock Dow were manipulated to keep them rising even as the rest of the market was rolling over into a correction. There were even confessions and boasting of such manipulations in the memoirs of some of the old-timers.

    Why keep the Dow positive as long as possible? The Dow represents the market to the majority of investors, and especially 100 years ago before the introduction of the S&P 500, Nasdaq, etc). So as long as investors saw the Dow was positive, they remained bullish and kept buying long enough for the manipulators, including big institutions, to unload their holdings in the rest of the market. And only after they had that accomplished would they proceed to dump their holdings in the 30 Dow stocks, which finally made it obvious to everyone that a serious correction was underway.

    I’m not saying that is happening now, particularly the manipulation part (since that would be impossible given modern-day regulations).

    However, the short-term divergence shaping up between the DJIA and the DJ Transportation Avg. and Russell 2000 is yet another cautionary situation.

    Risk management is as important as being on the right side of the market or selection of holdings.  In the interest of full disclosure, even though remaining on the buy signal for the overall market, I and my subscribers took our double-digit profits from both the iShares Transportation etf, symbol IYT (on March 18), and the iShares Russell 2000 etf, symbol IWM (last week), because they both had become so unusually overbought above their long-term 200-day moving averages.


    It remains to be seen if we were too early. They may recover. But so far it’s been a wise move. And if they don’t recover the divergence is potentially a warning for the rest of the market.

    As we have been saying – Remain alert!

    Numerous Divergences Also In Global Markets.

    We exited holdings back in February in the Canadian market (the iShares Canada etf EWC), and emerging markets (VanGuard Emerging Markets etf, symbol VWO).

    We’ve had a number of our global subscribers (we have subscribers in numerous foreign countries) thanking us profusely for those calls, as those markets have been collapsing since.



    We gave sell signals on several more global markets a couple of weeks ago in the current issue of the newsletter.

    But yet, as in the U.S. there are divergences, with some global markets in the beginning of potentially serious corrections, while others continue to rally.




    To read my weekend newspaper column click hereForget About The Fed Dialing Back QE3 – Buy Bonds!

    To read my previous weekend column, click here: This Is the Most Critical Time for the Market Since 2007!

    Subscribers to Street Smart Report: In addition to the charts and signals in the ‘premium content’ area of today’s blog, there is an in-depth ‘Bonds, Gold, Dollar, Commodities’ update from Thursday in your secure area of the Street Smart Report website.

    And there will be an in-depth ‘Global Markets’ update there for you early next week.

    Images: Flickr (licence attribution)

    About The Author


    Sy Harding publishes the financial website Street Smart Report Online and a free daily Internet blog at Sy’s Free Blog. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!

    It includes our research and analysis on the economy and markets, and provides charts and buy and sell signals on the major market indexes, sectors, bonds, gold, individual stocks and etf’s, including short-sales and ‘inverse’ etf’s.

    It provides two model portfolios as guides. One is based on ourSeasonal Timing Strategy, one on our Market-Timing Strategy.

    In depth updates are provided every Wednesday, with interim ‘hotline’ updates every time we make a trade. An 8-page traditional newsletter Street Smart Report is provided on the website every 3 weeks, in pdf format for viewing or printing out.

    There is the Street Smart School of online technical analysis ‘seminars’,commentaries to keep you ‘street smart’ about Wall Street, and much more.