Sound The Alarm Bells

…and look out below.

On October 9, 2007 the Dow set an all time high of 14,164. On that same day the S&P reached its Mount Everest of 1,565.

The Dow, S&P and other broad market averages have been on a gut wrenching decline for a year now. As of today, the Dow is 26% off of the high mark it set a just year ago. The S&P has dropped by almost 29%. The Nasdaq is down 31%.

The fourth quarter of 2007 was hardly a party. Problems in the credit and housing markets could be seen by anyone with their eyes open, but it’s been surprising to see how quickly things can go from not good to really, really awful.

Looking back, it’s easy to see that the market has been in a bearish trend for a year. But according to Dow Theory, a primary bear market can only be identified when both the Industrials and the Transports confirm it. Charles Dow, co-founder of Dow Jones & Company and The Wall Street Journal, noted that equity prices of the manufacturing sector would reflect an economic downturn and then the downturn would be reflected in the equity prices of the transportation sector. A company that manufactures less, ships less.

On July 2 of this year the Dow entered bear market territory when it closed at 11,215, down 20% from its all time high. However, the Dow Jones Transportation Index has refused to confirm the bear market. In fact, before today the DJT had been moving along nicely all year and reached its all time high of 5,492 on June 5.

The 50% Principle...

Today the Dow closed below 10725, which is the midpoint between the 2002 low of 7286 and the 2007 high of 14,164.

The Dow Jones Railroad Index crashed, down almost 11%. The broader Transportation Index closed down 399 points or almost 9% to just 37 points above its January low of 4140. According to Dow Theory if the Transportation Index closes below 4140, that will be a confirmation of a primary bear market. I’ll be watching that closely. It’s an ominous sign. If a primary bear market is confirmed, next stop for the Dow is probably in the 9,600 range. The balance scale will have tipped to the downside and the Dow will most likely approach the 7,200 level, where the 2002-2007 advance started.

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The Vice Presidential Debates were not nearly as fun to watch as I was expecting. Palin was only a 7 on a scale of 1 to 10 in the trainwreck category. Although I think he won, I was underwhelmed by Biden.

The thing that was most troubling was the energy portion of the debate. Lots of talk about "foreign oil", "drill baby, drill", alaskan pipelines, offshore drilling, alternative energy... but not one mention of the real problem - consumption. The problem is not where the oil is coming from, and how to get more of it. The problem is getting off of it as quickly as possible. If we don't figure that out soon, the financial problems we're currently facing will look like the salad days in hindsight.