The Summer Rally has now carried the market right into the time period for the Santa Claus Rally. The market escaped the dreaded autumn decline and we are now in the "best 6 months" of the year. Furthermore, even I have been saying that my intermediate-term indicators that turned up way back at the summer lows have been positive and that in spite of the Dow theory non-confirmations the trend, according to Dow theory, remains bullish. So, why worry? What could go wrong?

Let me begin by once again confirming that according to Dow theory, the trend is indeed still bullish. Let me further stress that the non-confirmations we have been watching are warnings and nothing about this picture has changed. Legitimately, this begs the question, "Then why be concerned and why worry?"

The short answer is that since the summer rally began and carried the Industrials to new all time highs, the Secondary trend, according to Dow theory, has been positive. My read also indicates that the Primary trend is positive as well. So, from that perspective, we haven't had and still don't really have anything to worry about. The trend is still up!

However, there is another side to the overall technical backdrop and it is worrisome. To begin with, the ongoing and now over 6 month Dow theory non-confirmation serves as a major warning. A non-confirmation of similar duration occurred in conjunction with the 2000 top. Nothing has happened with the latest push up or even in the last several years to invalidate the meaning of Dow theory non-confirmations. So, as long as this ongoing non-confirmation exists, it still serves as a warning that just cannot be overlooked.

Next, I want to look at the market internals. In the chart below I have included a daily chart of the Dow Jones Industrial Average and an Intermediate-Term Advance/Decline line. I like to use the intermediate-term A/D line because it shows the distribution that begins to take place as the market moves into the intermediate-term cycle highs. I have marked several of the intermediate-term cycle lows going back into late 2004 with an "I". Like I have said here time and time before, non-confirmations are not buy or sell signals. They are warnings. The buy and sell signals come from other indicators. The duration of some of these non-confirmations can vary, but nonetheless, all non-confirmations lead to corrective action down into the intermediate-term cycle low. So, logically, the ongoing non-confirmation between price and this intermediate-term A/D line can only be viewed as another warning.

In the next chart below I have included my Intermediate-Term Advance Decline Volume Differential for the entire market. This indicator is comprised of the AMEX, NASDAQ and NYSE volume data. Note the divergences that have taken place here as the market has pushed into intermediate-term tops over the last couple of years. The fact that we are now seeing another such divergence is indicative that the marked is moving into another intermediate-term top. For the record, this non-confirmation can continue even further before an actual sell signal is given. My point here is not to try and talk the market down or to try to say that we have a sell signal in place because we don't. My point here is that, according to Dow theory, the trend is still up, but that we are also seeing an array of warning signs developing. We must keep an eye on these developments because they will ultimately lead to a decline into the next intermediate-term cycle low. With these warnings in place, once another sell signal is actually triggered, odds are that signal will take the market down into the next intermediate-term cycle low.

No doubt about it, the price advance is still very much intact. But, we haven't seen a correction of any significance in 6 months now and that in and of itself is reason enough to expect corrective action. Also, this advance has created an environment in which there is basically no fear in the market place. I have known for weeks that complacency was high and now we are seeing evidence of just how deep this complacency root runs. As an example, the VXO, which is the old VIX, hit the lowest intra-day reading this past week since 1993. A high complacency rate equates to a low VXO reading, while fear relates to a high VXO reading. If you are unfamiliar with the VIX please see www.investopedia.com/terms/v/vix.asp. Anyway, the 1993 reading was the lowest reading ever, so this leaves this week's reading as the second lowest reading on record. I might add that the market moved into the 4-year cycle top one month later in January 1994 and then rolled over into the 4-year cycle low in April 1994. Well, it's interesting to note that the collective data surrounding the 4-year cycle has been telling me for months that the 4-year cycle low is still ahead and that this extended push up is the market still pressing up into the 4-year cycle top. The VXO fell short of readings typically seen at 4-year cycle lows back at the June/July 2006 lows, which is but only one of the many many reasons I have been saying that the summer low was not the 4-year cycle low. Now we are seeing the VXO sitting at its second lowest level ever as the market presses higher into the 4-year cycle top. This extremely high level of complacency is being made in conjunction with the Dow theory non-confirmations, the fading of intermediate-term internals, plus the mountain of evidence on the 4-year cycle suggesting that we are still making the top and that the low still lies ahead. I find it very very interesting that so many are so complacent in spite of so many warnings.

Since 1896, the inception of the Dow Jones averages, there have been twenty-seven completed 4-year cycles. When looking at the data surrounding these cycles collectively, it still suggests that the 4-year cycle low also still lies ahead and that we could even still see the market press higher into the top. But, nothing has changed the statistical data surrounding the 4-year cycle and the evidence is that the 4-year cycle low still lies ahead. Most people are not expecting the decline into that low. Most people seem to be totally discounting the 4-year cycle altogether feeling that it's no longer relevant or that it has already bottomed. I'm not buying it because the data just does not support it. Sorry, I have to go with the data rather than feeling or popular opinion.

Now, when we add the current divergences between the averages and the internals along with the extreme complacency and statistics that continue to tell us that the 4-year cycle low is still ahead, it is reason for concern. So, it is when we look at this data collectively that I find the current conditions worrisome. Nonetheless, until an actual sell signal is triggered, these divergences can continue and the market can press even higher.

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