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Dow Divergences Reaching Historic Levels
Since 1929, the Dow Jones Industrial Average has rarely ever been so close to a 52-week high while the Dow Transports AND Dow Utilities were so close to a 6-month low.
A few weeks ago, we ran a series on divergences in an attempt to provide some statistical evidence to the debate on this ambiguous topic. Given the attention paid to the Dow Theory (i.e., the relationship between the Dow Industrials [DJIA] and the Dow Transports [DJT]), several of the posts were focused on it, as well as the interplay with the Dow Utilities. The general takeaway from the series was the same thought we had going into the studies: divergences are present at a lot of major market tops, but also at a lot of other times as well. That is, divergences are like most everything else – at times, phenomenal signals but unreliable.
Of course, the impetus behind the timing of the series on divergences was the presence of several of them at the time. And while many of them are still present today, we have resisted covering them further for a couple reasons. For one, we were tired of posting research on divergences. Secondly, one of the conclusions we reached was that, even in the cases where they eventually prove meaningful, divergences can persist for a long time before any repercussions. Therefore, while there continue to be divergences, we have found nothing new to report regarding them. Until now, that is.
While we don’t want to get lured too far down the divergence road again, there is one more angle to the divergences among the Dow indices that has recently caught our attention. Over the past few weeks, the Dow Jones Industrial Average has traded at or very close to its 52-week high. At the same time, the Dow Transports AND Dow Utilities have traded at or near 6-month lows.
Specifically, on June 10, the DJIA was less than 2% away from its 52-week high while the DJT and DJU were less than 1% away from their 6-month lows. That was just the 3rd day in history (since 1929) that we can find such circumstances – September 19, 1994 and December 9, 1999 were the others.
Even loosening the parameters a bit, it has been rare to see the DJIA so close to its highs while the other 2 averages were so close to their lows. From 1935-2014, there were just 33 days on which the DJIA was within 3% of a 52-week high while the DJT and DJU were within 3% of a 6-month low. The last 6 weeks have seen an additional 20 such days.
The previous 33 occurrences mostly happened in 5 clusters:
- November-December 1959
- May 1969
- June 1972
- September 1994
- December 1999
What transpired following the previous instances? Like every study, the returns going forward were mixed, especially in the short-term. However, in the intermediate-term, the returns were decidedly not mixed. They were negative, at least for the DJIA and the DJT. For the DJU, it was a different story.
The median return for the DJIA and DJT was negative on all time frames, from 1 month to 1 year. Things were particularly bad – and consistently so – at the 3-month marker. The median 3-month return in the DJIA was -4.9% with just 3 of the 33 days showing a positive return. The DJT was worse. Not a single day of the 33 saw a positive 3-month return, resulting in a -12.2% median return. Again, many of these occurrences came in clusters, however those are still pretty consistent results.
The DJU, interestingly enough, showed not only positive returns from 3 months to 1 year, it actually had above-average returns. This is likely partially explained by the fact that the average had already been severely beaten down on several of the instances in the sample. Meanwhile, the DJT, while near a 6-month low was not down nearly as much as the DJU on most of the occasions. So there was likely some mean-reversion effect to the Utilities’ returns.
Incidentally, regarding the dates mentioned above: following 9/19/1994, the DJIA, DJT and DJU went sideways for 6 months before exploding to new highs. Meanwhile following 12/9/1999, the DJIA and DJT bounced for 1 month before topping for the next 5-7 years. The DJU, meanwhile, put in an immediate low that would last for 2.5 years.
So what is takeaway from this new look at the Dow divergences? Is there any new information or wisdom to be gleaned by it? Probably not. It is most likely just evidence to suggest that while divergences can persist for awhile, this one can be put into the “awhile” camp at this point. Its separation has now reached historic proportions and we would guess that, if the divergence is to mean anything, it will likely be known soon and felt over the intermediate-term.
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To infinity - and beyond! ;)
Aren't the numbers telling us that transportation and the Dow is decoupling? Duh. Much of our GDP is being generated electronically. I spend a small fortune every month on stuff that's delivered electronically: cable, phone, storage, etc.
yes, more to the point. Much of the GDP is now electronic paper-pushing!!
Fuck em, these bankers/financiers add nothing of real value. They are obsolete now and are nothing more that useless middle-men between the computer/printer (where money is "created") and the producer/consumer in the real economy!!!
Fuck em!!!!!
Moral hazard is a real bitch now that money creation no longer requires and real collateral and everyone knows it!!!
Global Financial Architecture and Economic Systems on Verge of Collapse
What is this post...some sort of "analysis"?
I stopped reading those last year.
/Slow learner.
Once again, there is no "market".
central planners and oligarchs via their political puppets are in full control of the "official" numbers.
Forward soviet!
Divergence is what make USA Sooooooooooooooooooooooooo exceptional
Personally, I think people are not looking at all this for the real opportunity that it is. Anyone who can create things of real value or who has real assets now holds all the power, because they have all the capital/collateral.
The bankers/financiers of "modern finance" have fucked themselves. They are now obsolete!!! Now that everyone on the planet is waking up to the fact that money creation no longer requires any real collateral, these fuckers are nothing more than useless fucking middlemen stuck between the printer/computer and the producer/consumer in the real economy.
" Now that everyone on the planet is waking up to the fact that money creation no longer requires any real collateral, "
Were it only so!
Fake, manipulated markets never make sense
it's different this time
Yeah, it's run by fucking pre-programmed computers and when the fascist bastards have made enough, they will pull the plug.
Peak euphoria
Long Euphoria, Short Sanity.
ECB raises emergency funding for Greek banks by $3.7bn
LOL!!! from where exactly did they raise these funds? Please, money creation no longer requires any real collateral...
moral hazard is indeed a real motherfucker.
Damn, it is amazing what you can do with complete control of a printing press and zero oversight. Like they are Gods! Who would dare to question them?
Guys at the NY Fed need a "Stock trading 101": You buy both or none at all.
All meaningless, just bet on black any amount you can stand to lose.
A&P considers filing for bankruptcy - Business Insider
A&P is considering filing for bankruptcy, Bloomberg reports.
The 156-year-old chain was once America's largest grocer with more than 15,000 locations.
Now, it has fewer than 400 stores and it's struggling to stay in operation.
yes, the pretty facade is crumbling...
I mean, who needs to eat anyway...
tick tock motherfuckers!!!!!!
A&P already filed BK in 2010!
That tells me this fucker is toast if they couldn't even last 5 years outside BK.
This is not your daddy's Federal Reserve set of banksters.
It's the ivory tower PhDs Keynesian disciples running this crap show and blowing these huge bubbles.
As an Investor with decent knowledge of Technical analysis, the divergences in almost all indices across the globe is alrming. When divergences show up in daily and weekly charts trading caution is urged, however when they show up in the monthly charts it is a forewarning of TREND change. In most global markets by January of this year storm signals were seen everywhere. However the bull run is over is what charts tell us but the ticker is also conveying that markets are being artificially propped up. When Technicals get very stretched catastrophe is around the corner, says an small Investor who has paid high tution fees to learn his lessons over thirty years.
As an Investor with decent knowledge of Technical analysis, the divergences in almost all indices across the globe is alrming. When divergences show up in daily and weekly charts trading caution is urged, however when they show up in the monthly charts it is a forewarning of TREND change. In most global markets by January of this year storm signals were seen everywhere. However the bull run is over is what charts tell us but the ticker is also conveying that markets are being artificially propped up. When Technicals get very stretched catastrophe is around the corner, says an small Investor who has paid high tution fees to learn his lessons over thirty years.