The Dow Transportation average climbed to a new five-year high on Friday of 3435 but suffered a bearish daily reversal and closed on the day's lows. Meanwhile, the Dow Industrials closed at a new ten-month low, thus prolonging this non-confirmation between the averages to five months.
Recall that the only other divergence of this type and magnitude occurred in 1977 for nearly five months as the Industrials struggled to overcome the psychological 1000 mark before both averages headed down together with the Industrials falling 27% and Transports loosing 20%.
As we alerted our subscribers, we deployed our bearish bets this month when the Dow broke back below 10,000. If the Transports get in synch to the downside we could see a sharp decline in the broader averages over the next few weeks as we forecasted nearly one month ago. We feel this is a distinct possibility as the Transportation average has recorded yet another bearish divergence between price and momentum while the RSI is close to breaking its uptrend line from the August lows, which is a typical sell signal for a market as it approaches its final top.
Also note the divergence between the two measures of investor bullishness at key inflection points in the market going back to February. Each major peak and trough has seen a divergence whereby one heads in the other direction just before the turn. Moreover, the most recent reading of Investors Intelligence bullish percentage survey was 58.9% - the highest since the S&P 500 reached a two-year peak of 1163 back in March. As we see it, the market should decline for the next two weeks as it did back in March, but if that is the case, the US markets will suffer a major technical breakdown.
Meanwhile, the Bulls try to rationalize the market's poor performance by blaming oil despite the Transports and Small Caps rallying along with record highs in oil. There is an Alice-in-Wonderland quality to it all and regrettably for the Bulls, time tested indicators like the Vix, and market sentiment measures don't show extreme pessimism. If they did we would be buying.
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