That being said, according to Dow Theory, there was a reconfirmation of the sell signal of November 2007 last week, when the DJIA (7365.67) broke below its November 2008 closing low at 7552.29, which confirmed a similar violation by the D-J Transportation Average (TRAN) back in January.

There was also another 90% downside day registered last Tuesday (that is, points lost equaled 97.6% of the sum of points gained plus points lost, and downside volume equaled 95.2% of the sum of upside plus downside volume), when the DJIA tumbled nearly 300 points. It was the fifth 90% downside day since mid-January.

Usually, such clusters of 90% downside days are a precursor to a tradable bottom. However, for that to occur, we need to see the Buying Power Index rise and the Selling Pressure Index fall, upside over downside volume improve, the advance/decline line stabilize, more daily new highs than new lows, and the Primary Trend Index to turn bullish from its current bearish configuration. Regrettably, none of this is occurring.

Consequently, about the only macro sector investments that are working on the long side year-to-date are the precious metals. Fortunately, I have been bullish on gold since the fourth quarter of 2001, even though I recommended rebalancing (read: selling) 30-40% of all positions in November/December 2007, because they had grown into too large a “bet” in portfolios.

Last Friday, gold traded above $1000/ounce for the first time since March 2008. The recent surge has lifted the ratio of gold to the S&P 500 some 60% above its 200-day moving average, or the most overbought relative to the S&P since gold’s parabolic peak in January 1980. That’s why, rather than adding to gold positions, I recently recommended the purchase of platinum.

Interestingly, while gold is challenging its old cycle highs, platinum is more than 50% below its 2008 high, as can be seen in this chart:


Click to enlarge

The call for this week: While many pundits argue Dow Theory has become an irrelevant indicator (see Be Leery of Dow Theory for more on this), it did indeed give participants a sell signal in November 2007. Regrettably, it reconfirmed that sell signal last week.

Interestingly, however, despite the Desultory Dow, the S&P 500 continues to reside above its November 2008 lows. Still, other than precious metals, not much is working on the long side” year-to-date. Of all the indices I track, the NASDAQ 100 is performing the best, with negative returns of -3.2% YTD, while the D-J Transports are the worst performing, at -23.7%.
In fact, in my universe, in addition to the precious metals, only coffee (+2.65%), sugar (+7.22%), copper (+8.55%), lead (+7.01%), tin (+4.30%), and the US Dollar Index (+6.50%) are showing positive returns year-to-date.

Consequently, while I would like to be as positive as my portfolio manager friend, I need to see more technical evidence that last week’s breakdown is false before committing more capital to stocks. I do, however, still like the strategy of accumulating distressed debt; one of the vehicles I’m using is Lord Abbett Bond Debenture Fund (LBNDX).