Are the Dow Industrials and Dow Transports Coming Undone?

One of the latest letter writers to make noise on the Internet is the author/editor of Dow Theory Letters, Richard Russell. He advises his followers to sell everything that is liquid because “you won’t even recognize the country by the end of the year.”

The truth is, Mr. Russell doesn’t know whether there’s going to be a new bear market or not. Neither do I … neither does anybody. (Naturally, I have expressed my concerns about emerging market stocks in numerous features, but I do not have any idea of the next bear’s inception.)

So instead, I will take a look at certain facts, and then present my interpretation of what those facts might mean … like Mr. Russell has done.

The April 26th high for the Dow was 11205.

According to Russell, if business is so great for 30 of America’s top companies, why is the Dow down more than 600 points? (It’s actually down 700ish.) This popular Dow Theorist appears to be abandoning the fact that the primary trends for the Dow 30 and the Dow Transports are still up, in spite of the 6% pullback.

Corrections can come about for the smallest of reasons, and 6% off the highs is hardly a Greek tragedy. In fact, when one takes into account the 14 months of bull market gains without an actual 10% correction, the problems in Greece and with the euro alone are reason enough to cause profit-taking.

(Dow Theory Queries: Wouldn’t we need to see “lower lows” from the Dow 30 and the Dow Transports? What about a close below the 200-day moving average?)

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On April 26th, 674 new price highs on NYSE, and only 20 on May 14th.

Russell expresses consternation about the lack of breadth. However, if the Dow has fallen 6% from its peak, in what way is it shocking that other NYSE stocks are off their highs? Isn’t that what happens in health-restoring corrections/consolidations as often as it occurs at bear market inceptions?

My point here is simple. The facts in #1 and #2 above only support the idea that stock assets do not go up in a straight line. Not even in “Dow Theory” do these facts distinguish between a normal correction and the mind-boggling bear that’s being predicted.

Dow Theory Letters has “under-whelming” track record.

If we’re to recognize predictions, we should be able to see a correlation with enhanced performance. If nothing else, we should see better-than-average or better-than-buy-n-hold performance, right? Well, that’s not the case here.

According to Hulbert’s Digest, The Dow Theory Letters Newsletter has a 10-year annualized track record of -1.1%, which ranked the service 81st in a field of 100. Over 20 years, the service ranked 41st in a field of 50 with a 4.5% annualized record.

Honestly, I’m not sure how finishing in the bottom quartile over 10- and 20-year time periods boosts confidence in the predictive value of the author’s recent comments. Still, I wouldn’t rule out the bearishness of seeing “lower lows” or the bearishness of a genuine change in the primary trends for the Dow Industrials Trust (DIA) and the iShares Dow Transports (IYT).

As of right now, DIA is still in a long-term uptrend above its 200-day moving average:

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As of right now, IYT is still in a long-term uptrend above its 200-day MA:

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Disclosure: No positions