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Looking for Confirmation, the Dow Industrials Fly Solo

David Becker
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Looking for Confirmation, the Dow Industrials Fly Solo

U.S. stocks experienced mixed flows in the later part of the week. A pullback from recent highs given some recent headwinds which include technical divergences as well as the lack of confirmation from key indices. Although the Dow recently rose to fresh all-time highs above its December peak, short-term momentum indicators failed to confirm this high.

The daily MACD created a negative divergence. Another negative divergence exists between the Dow Industrials and the Dow Transports. The Dow Transports did not confirm a fresh all-time high. One of the key points in Dow Theory is that both averages need to hit new highs in order confirm the market uptrend. I appears that the transports are facing headwinds as oil prices hold steady.

One of the leaders in 2014 rally has now become a lager. The Dow Utilities fell sharply during the month of February. That’s have been due to an increase on longer term bond yields over the past month. Utilities track bond prices very closely and underperform when bond prices drop and yields climb. The Dow Utilities index is in the process of testing its 200-day average. A break of this level could spell trouble for utilities as a group.

The recent outperformance of stocks over bonds may have run its course over the short run. The ratio of the S&P 500 divided by the 20+Year Treasury bond. The stock/bond ratio jumped during February as stocks rose and bond prices fell. The stock/bond ratio is starting to stall near its 200-day moving average near its September/November highs. Bond prices have continued to fall on stronger than expected economic data. Momentum on the spread between stocks and bonds is also flattening which can be view by the leveling out of the MACD.

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