I've been studying Dow Jone's stock market theory - probably too much. But it's really interesting, and offers some insight into the psychology of the stock market. One aspect of the theory that has been pretty well dead on the money comes from Dow's observations of the relationship between the Dow transportation index and the Dow Jones industrial average. Specifically, when one average reaches a new high, but the movement is not confirmed by the other average, it's a sign to stay nimble and be wary. This can also help you to "buy low", if only simply by avoiding buying into the top of a stock market rally.The above picture illustrates - back in July 2011, the transportation index hit a new high (relative to itself), but the Dow failed to confirm the move. Then later on in the month, the Dow attempted to break through it's old high, but the transportation index moved sharply lower. The next move was sharply down for pretty well all indexes in the stock exchanges world-wide. Let's hear it for globalization!
Fast forward to right now ... the Dow just hit a series of 52-week highs, which were not confirmed by the transportation index. If this behavior continues (i.e. the transportation index then hits a new high and the Dow doesn't), I would expect a sharp move down for the market as a whole. The time horizon here is months, not years. If nothing comes to pass, then once the markets get into the vicinity of the old highs from 2007/2008 (see here), the stakes become significant. This is especially so if the divergence becomes pronounced and frequent around those highs or anytime after that, just like it did before the dot-com crash and the 2008 meltdown.
Perhaps its time to start thinking about hedging strategies. Oh wait .. I know a good one ... gold! But only if you buy at generally the right time, which translates into "before the turmoil begins". Given what we see between the Dow/transportation relationship, right around now would be a great time to buy-in. The price of gold has been hammered down to the $1,645(ish), but there is some significant data coming out of shadowstats that is painting a picture much less rosy (and unfortunately, accurate) than the dovishness being peddled by the mainstream. The lesson here is to start thinking about being nimble ... to 'get ready', as the title of this post suggests.
The picture below illustrates the hedging potential of Gold in the face of market turmoil. The case for silver is even more compelling, albeit more volatile.
Happy investing.
R
