Why Some Investors Are Worried About Dow 13,000

Why Some Investors Are Worried About Dow 13,000
Market News
Like Us On Facebook
Like Us On Facebook

What’s not to like about Dow 13,000? While most investors cheered when the blue-chip index closed above that level Tuesday for the first time since May 2008, some were wringing their hands. The Dow Jones industrial average has left the Dow transportation average behind, and that could mean trouble.

“There’s a risk that stocks could slide,” says Bruce McCain, chief strategist at Key Private Bank. Adds Dennis Slothower, editor of the investor newsletter Stealth Stock Daily: “When the Dow leads everything else, that’s not a healthy sign.”

The rap on the Dow is that it tracks the biggest, most financially stable companies. Technical analysts, who study previous stock movements to anticipate future ones, say you have to look at other indexes, too.

Take the Dow Jones transportation average, the granddaddy of indexes, which traces its origins to 1884. It tracks railroads, shipping companies and airlines – the businesses that move people and goods through the economy.

This collection of 20 stocks fell 3 percent in February, counting reinvested dividends, while the better-known Dow Jones industrial average rose 2.5 percent. Since last April, the high for most indexes last year, the transports have dropped 6 percent, compared with a 1.2 percent gain for the Dow.

Technical analysts say that if one index reaches a high and the other doesn’t, that means the rally could falter. They say that’s what happened before stocks tanked in 1929, 1937 and 2000.

The analysts disagree over how much to worry now. And the Dow is not the only index climbing fast. A day after the Dow closed at 13,005, the Nasdaq composite index of technology stocks briefly broke through 3,000 for the first time in 11 years.

Still, there are worrisome signs besides transportation stocks that the rally may not last:

- The price of gas is up, too. The average for a gallon of unleaded is $3.74, the highest on record this time of year. Some investors believe gas prices are the biggest threat to the rally because when people pay more at the pump, they often spend less elsewhere.

- The Russell 2,000 is still off its high. The popular index of smaller stocks, the kind of iffy outfits that surge when investors feel like taking big risks, has rallied 8 percent this year but is still 6 percent below its high of April 29.

- Traders are scarce. About 4 billion shares are trading every day on the New York Stock Exchange, compared with about 4.4 billion last year. That suggests investors aren’t buying with much conviction.

- Main Street still isn’t bullish. Investors pulled $137 billion from U.S. stock mutual funds from last June through January, according to Strategic Insight, an industry consulting group.

Technical analysts watching the transportation average for signals to buy or sell can make your head spin with their talk of “head and shoulders patterns,” “Fibonacci retracements” and “resistance areas.” But even investors who usually talk in normal English have taken note of the lagging index lately and lapsed into techno-speak.

A day after the Dow hit 13,000, David Rosenberg, the normally lucid chief economist at Gluskin Sheff & Associates, put out a report noting the recent “nonconfirmation” signal from the transportation average. A few days earlier, the folks at research group Bespoke Investment wrote a note to clients pointing out the “negative divergence” themselves.

Translation: Watch out.

Investors trying to guess where stocks are heading like to follow the transports because if consumers and businesses are buying more, then all those goods have to be trucked, shipped and flown somewhere, and stocks should be rising.

Technical analysts like to see them rising together with the Dow industrials, and the two hitting highs together. When one hits a high, and the other lags, the technical crowd sees trouble.

That’s the gist of the so-called Dow theory, a venerated gauge of when to buy and sell named after Charles Dow, co-founder of The Wall Street Journal. He came up with the first average of 11 railroad and shipping companies, including the once mighty Pacific Mail Steamship Co.

You’d think a measure devised when Chester A. Arthur was president and men walked around with mutton-chop sideburns would have lost its appeal by now. But the index has provided a clue to some big turning points in the market, or so its fans say.

Not everyone is not convinced that we’re at a turning point now, and that the rally could falter.

Fred Meissner, the writer of the Fred Report, an advisory service for technical investors, doesn’t think so. He says the transports, far from lagging the Dow in hitting a high, are actually leading the Dow.

It depends, he says, on how you define lagging and leading. He thinks the two indexes are basically hitting highs together. The transports just hit their high earlier – an all-time record of 5,618.25 last July.

“I would be buying stocks here,” he says.

If you find this a bit confusing, there are plenty more straightforward reasons to be optimistic. For starters, stocks are trading at 13 times their estimated per-share earnings for the coming year, cheap compared with the typical 15 times.

Then there’s the strengthening U.S. economy. Layoffs are at a four-year low. On Thursday, retailers supplied more good news: Sales in February compared with a year earlier were up a surprising 6.7 percent.

Still, it doesn’t hurt to keep an eye on transports. Slothower of the Stealth Stock Daily say he’ll hold on to his stocks, but if the index drops below its average close over the past 200 days of 4,954, just 4 percent lower than Friday’s close, all bets are off.

“People are being more defensive,” he says. “That’s not a good sign.”

Associated Press

Share Tweet
Like Us On Facebook
Like Us On Facebook

Preston Waters

Preston Waters is a thinker. He's not your traditional philosophical persona, however, as he leaves no topic untouched. Covering all the bases, from business to women, Preston Waters is the ultimate man's man for Gen-Y.

More In Market News

News Preston Waters

Stocks Off to Stellar Start in May

Stocks were kicking off May in high style Tuesday, posting sharp gains after a much better-than-expected report on U.S. manufacturing activity. The Dow Jones Industrial Average was rising 103 points, or 0.8%, at 13,317, after hitting a four-year high at 13,338. The S&P 500 was up 14 points, or 1%, at 1413, and the Nasdaq was adding 23 points, or 0.7%, at […]

News Preston Waters

Bank Of America, JPMorgan: Dow Midday Movers

U.S. stocks were rising in midday action Tuesday following a better-than-expected read on U.S. manufacturing activity.The Dow Jones Industrial Average was up more than 116 points, or 0.9%, at 13,330. The biggest percentage gainers within the Dow were Bank of America (BAC), JPMorgan Chase (JPM) and Intel (INTC). Shares of Bank of America rose 2.59% to $8.32. The bank said Tuesday it plans to lay […]

News Preston Waters

Monster Stocks Soar Amid Rumors Coca-Cola Is Set To Buy Energy Drink

Monster Beverage Corp’s shares soared on Monday following a report that Coca-Cola Co. was considering buying the energy drink maker. The Wall Street Journal cited unnamed people in reporting that the world’s biggest soft drink maker was in talks to buy Monster. If a deal transpired, Monster would be Coca-Cola’s largest brand acquisition ever. Monster declined […]

News Preston Waters

Stocks Surge After Strong Manufacturing Report

Stocks were surging in morning action Tuesday after a much better-than-expected report on the pace of national manufacturing activity in April.The Dow Jones Industrial Average was rising 80 points, or 0.6%, at 13,294. The S&P 500 was up 12 points, or 0.8%, at 1410, and the Nasdaq was adding 29 points, or 1%, at 3075. Stocks finished modestly lower Monday, marking […]

News Preston Waters

Bank Of America Keeps Shrinking

Bank of America (BAC)’s plan to lay off some of its highest-paid executives looks like the right response to the current banking environment. The Wall Street Journal reported Tuesday the bank will cut 2,000 positions in its investment banking, commercial banking and non-U.S. wealth-management units targeting “the high-earning employees whose efforts helped Merrill Lynch account for the bulk of […]

News Preston Waters

Stock Market Story: May 1

The first trading day of May got off to a mixed start early Tuesday with all three major U.S. equity indices honing to close to the flat line ahead of a key report on the pace of U.S. manufacturing activity in April. The Dow Jones Industrial Average was down 9.5 points, or 0.07%, at 13,204.The S&P 500 was up less than a […]

Also On Elite


Grab Your Liter Of Cola, There’s A ‘Super Troopers’ Sequel Coming

Oh, happy day! A “Super Troopers” sequel is officially in the works. We’ve been hearing rumors about this one for years now, but, according to Steve Lemme, who played Mac in the original, this thing is definitely happening. Lemme said, The fans have been asking for it for a while, but we were finally able […]


5 Reasons Why One Prominent Conservative Judge Claims Voter ID Laws Are Ridiculous

A popular political talking point from the past decade has been voter fraud and enacting voter ID laws to combat such sinister actions. The 2012 Presidential Election illuminated that the laws were less about protecting the integrity of our elections and more about manipulating the voting pool and disenfranchising voters who were likely to vote […]