Am I the only one who is surprised that the market is this oversold and can't rally? I thought for sure we'd see a solidly up day after declines Monday and Tuesday. There is still a chance we get another rally this week instead of this hovering at 2100 that has become standard fare on the S&P 500. Although a longtime reader did remind me that it's been a long time since we saw an oversold market that can't rally.
Away from that, I think all eyes were focused on the utilities and transports during Wednesday's session. The utes have not broken 570 yet -- they hovered there, made that the low of the day, and closed up a smidge. If we look at the chart dating back to December 2013, we can see the utes are desperately trying to hang on for dear life. We can see the break, but it needs some follow-through to convince me the break is right now. I always give a break like this more time to prove itself or time to recapture the line. We should know within a few days.
Since I have discussed the utes so often this year, I thought I would spend some time discussing the transports and their current situation. There was much discussion today about the break -- or imminent break -- in the transports. There is a flat line that has technically broken, but if you use a thicker pencil it might be considered still hovering at the line. A strong break -- and by that I mean one you can see with the naked eye -- would surely capture the attention of investors. It would also eventually measure to the 7900 area on the trannies.
However, if the trannies do break, you will hear a lot of chatter about the Dow Theory. For those who don't know, the Dow Theory is not a technical situation in the market, although everyone seems to want to put it in that category. It was developed as a series of tenets in The Wall Street Journal by Charles Dow. So the first thing to know is that it's called the Dow Theory not because of the Dow Jones Industrials and the Dow transports but because it was written by Mr. Dow.
The next thing to know is that Mr. Dow wrote it as an economic theory. Keep that in mind; do not get distracted just because folks show it on a chart. His theory was that the industrials should be doing as well as the companies that transport the industrials, and thus the theory was economic. I can recall writing about this, in much the same manner, back in 1999 when the transports were drooping. The pushback I got when noting that this was not a healthy market sign was that the Internet had changed everything; we no longer needed to transport people and things like we used to.
Of course, the bulls' argument turned out to be the kind of "it's different this time" stuff you hear at market tops. But more so, how can that be the case? When you order something on the Internet from Amazon (AMZN), doesn't it need to be delivered? Shouldn't that benefit UPS (UPS) or FedEx (FDX)? If a retailer is selling products, don't those products need to be delivered to the store via trucks, and shouldn't that benefit JB Hunt (JBHT)?
If the car companies are selling tons of cars, shouldn't a railroad company such as CSX (CSX) benefit from transporting those cars? Do not get me started on the airlines, which everyone loves, yet they sit there like they have lead in their shoes. I think you see my point.
Yet now we don't get the argument that it's different this time. Now I see something totally different. In the last few years, there has been a growing sense that if you can't prove something with a table showing exactly how the market performed at X point in time from that date when such and such happened, then that situation simply doesn't matter. In other words, there's a huge reliance on these statistics that must prove what the S&P did a month or three months later for it to be true.
Let me remind you that when I first started harping on the utes back in January, everyone scoffed at me. I was just an old market person who fussed too much. Folks tried to discredit my view that the market as a whole cannot go up well if the utes are struggling because they had no statistics to prove it. Yet here we are, five months into the year, and we have not been able to go up well. More so, the most recent reason given for why stocks act so punk? You guessed it: interest rates. Well, heck, isn't that what the utes were telling us?
So I can't prove to you whether the Dow Theory works or not. I can't prove to you whether a break in the trannies is going to be a negative for the market one month or three months or six months out. But I can tell you that a healthy market does not see the utes and trannies trading at lows while the industrials and the S&P are at highs.