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Under the Dow's Hood

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Discipline trumps conviction

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Late Friday afternoon, I received an email that I wanted to highlight again and comment further on with some additional charts, in case those of you on holiday missed it.

Kevin,
Just out of curiosity and wanted to see how well our beloved DJIA index is doing internally, I tracked only 11 / 30 of its component are trading above its 50day moving average and worse, only 9 are above the critical 200 day average. I just did this around 3pm EST (Friday), so it is discounting the 140 points rally. FYI.
-Minyan O

Minyan O-
Great observation. If one constructs a bullish percent (percent of stocks in DJIA on PnF buy signals) the reading is a paltry 52%, and only 60% of the components are in a positive trend.

This highlights the weakness in the price-weighted (DJIA) and capitalization-weighted (SPX) indexes versus, say, the "average" stock, which is better represented by the "more democratic" bullish percent index for the NYSE and Nasdaq, and the S&P 500 Equal-Weight Index.

According to Dorsey, Wright & Associates data, the NYSE Bullish Percent (stripped of all closed end funds) is at 64% and the S&P 500 Bullish Percent is at 66%, and both are rising.

The Dow Jones Industrial Average Bullish Percent, on the other hand, is falling. This is reflected in the relative weakness of this chart versus the S&P Equal-Weight Index, which Friday hit new highs.

The charts below of the S&P Equal-Weight Index ETF (RSP) and braoder Nasdaq Composite, compared to the Dow Jones Industrials and S&P 500, help show this divergence.

Quick question: Is this divergence among the indices bearish or bullish? Ultimately, it may indeed prove to be bearish. However, until the contextual indicators I follow change, I have no choice but to be disciplined and look for bullish setups and situations in "average" stocks while avoiding the "weak" setups and situations in the major indices.

All charts courtesy Dorsey, Wright. I have added text and trendlines on the charts where necessary.

Dow Jones (DJIA)

S & P 500 Index (SPX)

Nasdaq Composite (NASD)

Rydex S&P 500 Equal Weight ETF (RSP)


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No positions in stocks mentioned.

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