Bulls Beware: Dow Theory Non-Confirmation Signals Risk in Recent Stock Market Rally

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In a surprising turn of events, the Dow Industrials achieved a new 52-week high this week, creating a buzz on Wall Street. However, beneath the surface, a Dow Theory non-confirmation has emerged as Dow Transports experienced a -1.6% decline.

Sentiment in the market has reached three-year highs, with bulls expressing confidence in the rally. But there’s a catch – historical data suggests caution. Whenever breadth caught up in the past year, the market witnessed a subsequent rollover. This track record, boasting 100% accuracy, is a warning sign that bulls might be taking the bait of a false breakout.

The optimism surrounding the recent breadth rally, predicting new highs for the overall market, clashes with an underlying trend. While the Dow is on an upward trajectory, breadth is heading in the opposite direction – down. Despite the Dow’s positive momentum, the average stock has shown little progress over the past four years.

A cautionary note comes from the financial sector, indicating that the surge in equity prices has undone the market’s tightening conditions since September. Central bankers’ “higher for longer” message in September triggered monthly stock losses, setting the stage for a potential correction.

Major central bank liquidity, adjusted for factors like the Treasury General Account (TGA) and Reverse Repurchase Agreement (RRP), has seen a modest uptick in USD from the US. However, it remains below the level of the S&P 500. While liquidity might not be a pressing concern now, any tightening in the US could elevate its significance, potentially impacting the current market dynamics.

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As bulls celebrate the recent rally, the Dow Theory non-confirmation and historical patterns caution against complacency. The market’s true direction remains uncertain, and investors are advised to stay vigilant in these uncertain times.

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