Dow Theory Hints of Bear Market

Dow Theory is flashing some serious warning signs here. In Dow Theory, Dow Transportation average must confirm the highs or lows in the Dow Industrial average. This is now occurring. In fact, the Dow Transportation average is currently leading the charge lower and has now broken through the August panic lows.

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The strategists at Goldman Sachs Group Inc., Strategas Research Partners LLC and UBS AG say the Standard & Poor's 500 Index will climb 9.7 percent from its Nov. 16 close to 1,600 in the final six weeks of 2007, the steepest gain since 1971.

This month's drop in transportation stocks suggests equities may decline instead. With FedEx Corp. and Ryder Systems Inc. leading the Dow Jones Transportation Average to its lowest level this year, the rest of the U.S. market may slump too, according to the 123-year-old theory that says truckers, railroads and airlines lose business before the economy slows.

“The transports have broken down,” said Jack Ablin, who oversees about $52 billion as chief investment officer at Harris Private Bank in Chicago. “We're going to need a boost on the economic front to really help push the market higher. I wouldn't bet on it.”

The transportation average of 20 stocks, created by Wall Street Journal co-founder Charles Dow in 1884 to foretell economic trends, fell today to the lowest since October 2006. A drop in the 30-member Dow Jones Industrial Average, which Charles Dow compiled 12 years later, below its level on Aug. 16 would signal a bear market is about to begin, the theory holds.

“We've moved one step closer to a bear market,” said Chuck Carlson, an editor at the Dow Theory Forecasts newsletter who manages $130 million at Horizon Investment Services in Hammond, Indiana.”

Should these levels hold, expect a violent and impressive short covering bounce...