Non-Confirmation Still Troubling Traders

On Monday, a broad rally wiped out losses from Friday as big-cap stocks rebounded. The Dow Jones Industrial Average rose 1.3%, the S&P 500 gained 1.4%, and the Nasdaq jumped 1.2%. This left many traders wondering why institutional favorites with exposure to Europe advanced on a day when there was little in the way of positive news.

The U.S. dollar fell against the euro, which rose 0.7% to $1.0566. That alone probably accounted for much of the stock market’s gains. The strengthening greenback has resulted in cuts to earnings estimates for companies that rely heavily on exports. The dollar has risen by about 14% against the euro this year.

The Federal Reserve’s two-day meeting begins today, but we will not get a news release until tomorrow. The Fed did leak that its wording will likely not contain the word “patient” despite recent economic reports that indicate the economy is not growing at the rate the Fed uses to guide policy.

On Monday, the Fed reported that manufacturing output decreased for the third consecutive month, and homebuilder confidence fell as well. An increase in interest rates would not benefit builders or holders of bonds and other high-yielding investments like REITs. However, higher rates would result in greater income for banks and other financial institutions. (See the Trade of the Day.)

Crude oil fell 2.1% to $43.88 a barrel, and gold futures rose 0.1% to $1,153.30 an ounce.

At Monday’s close, the Dow Jones Industrial Average gained 228 points at 17,977, the S&P 500 rose 28 points to 2,081, the Nasdaq gained 58 points at 4,930, and the Russell 2000 was up 8 points at 1,240.

The NYSE’s primary market traded 756 million shares with total volume of 3.3 billion. The Nasdaq crossed 1.7 billion shares. On the Big Board, advancers outpaced decliners by 1.8-to-1, and on the Nasdaq, advancers led by 1.3-to-1.

Dow Jones Industrial Average Chart
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Chart Key

The Dow Jones Industrial Average is trading in a 1,000-plus point bull channel defined by its 200-day moving average at 17,274 and the March 2 closing high at 18,289. Above the 200-day moving average is a bullish support line at about 17,500. But since twin buy signals from my proprietary indicator, the Collins-Bollinger Reversal (CBR), were triggered close to the 200-day moving average, we will assume that it carries more technical significance.

Dow Jones Transportation Average
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Despite Monday’s jump by both the Dow industrials and the Dow Jones Transportation Average, Dow Theory purists will still insist that a “non-confirmation” exists since the transports have not confirmed the high made by the industrials on March 2.

I agree, yet the Dow Theory historically is more conservative in its results, lagging other indicators. At the same time, its accuracy cannot be denied.


Positive indications are everywhere that we are in a major bull market. However, confirmation of the near- and intermediate-term trend is lacking. Volume is puny and breadth at just 2-to-1 is thin compared to other major breakouts.

And to Dow Theory advocates, the inability of the Dow Jones Transportation Average to blast to a new high is unnerving. The transports’ November high at 9,310 should have been exceeded long ago.

Another sign of internal weakness is slightly more arguable, and that is investors’ euphoric reaction whenever the Fed throws them a bone rather than responding to positive economic data. Despite some relatively strong fundamentals, it seems that buyers emerge only when peripheral issues appear positive — like a weaker dollar, Greece’s loan extensions, or what Putin says or doesn’t say.

Have a happy St. Patrick’s Day.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.

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