Dow Theory Bear Market Signal & Sentiment Readings-- Follow-Ups

In the Dec. 10 issue of Barron's, Richard Russell, the publisher of Dow Theory Letters, discounted the Dow's recent (at the time) ebullience as characteristic of every bear kickoff.

"Often, bear market rallies look better than the real thing," warns Russell. "But once the market tops out, it will continue down until it's severely undervalued again."

Even if one is skeptical of technical analysis, one reason to care about Dow Theory is that so many others do--especially institutional investors who leave a large wake..

MrKen notes that the rally from the late November lows has resulted in weakened sentiment readings. According to Investor's Intelligence, the latest sounding of advisory sentiment showed a marked increase in bullishness to 53.3%, from 49.4%, and a corresponding shrinkage in bearishness to 25.6%, from 27.6%--these are, of course, contrary indicators (curtesy of Alan Abelson's-"Up & Down Wall Street" column-Barron's,12/17/07). Similarly, the AAII (American Association of Individual Investors) Index is 47.6% Bullish & 35.7% Bearish, up sharply from readings 3 weeks ago of 28.6% Bullish & 56.1% Bearish (from Barron's 'Market Laboratory-Indicators, 12/17/07).

It would therefore seem that the technical underpinnings of the stock market for a sharp "Santa Claus" end-of-the-year rally are absent from the scene--despite reported heavy insider buying of retail & some financial issues.

Disclaimer: MrKen is NOT a registered Investment Advisor & NONE of the above should be taken as investment advice. It is the writer's Personal opinion ONLY, except where specific cites are given. MrKen has no market positions at the time of this post.

To view this week's Barron's for free, follow this link (MrKen has no connection to Barron's, except as a devoted reader for over 40 years):

http://online.barrons.com/this_week

'Dow Theory' Major Bear Market Signal

According to the Nov. 12 issue of Barron's, Richard Russell, the publisher of Dow Theory Letters, indicated the potential of a classic Dow Theory bear-market signal.

"The Dow Jones Industrial and Transportation averages plunged to end-of-day lows of 12,845.78 and 4,672.35, respectively, on Aug. 16. Both then rallied. But while the industrials hit a record 14,164.53 on Oct. 9, the transports didn't come near a record, thus failing to confirm the DJIA's strength. This set up the potential for a classic DOW Theory bear-market signal."

"That signal would come if both averages--and I emphasize both--slip below their August 16 lows. The Transports did dip under their low last week, ending at 4603.92 ..."

MrKen notes that on 11/21 the Industrials closed at 12,799.04, below even the low ebb of trading during the summer's credit crisis--completing the Bear Market signal.

However, before any of my gentle readers rush to sell the market short, they should be aware that many short-term technical indicators are flashing strong 'BUY' signals-- such as insider trading activity. Again, according to Barron's Michael Santoli ('What to Ask Mr. Market'-11/26), for the week of Nov. 19, the ratio of insider selling to buying was down to four, deep in buy signal territory and at a level last seen the week of Aug. 23.

And there is dissent from certain quarters. UBS strategists and others have put forth the Baltic Dry index (a measure of spot cargo demand) as the 21st century transport average. It remains strong.

Disclaimer: MrKen is NOT a registered Investment Advisor & NONE of the above should be taken as investment advice. It is the writer's opinion ONLY, except where specific cites are given. MrKen has no market positions at the time of this post.

To view this week's Barron's for free, follow this link: http://online.barrons.com/public/main?refresh=on