Next Monday evening I will attend the retirement party for technical analysis legend Ralph Acampora at Grand Central Terminal in New York. Over the years, Ralph has been both a mentor and friend. His participation in numerous events that I have produced and conducted over the past decade has enabled many to gain from the market insights he shared. There isn’t a more generous person that I know than Ralph.
In having the benefit of hearing Ralph these many years, a common theme comes through – don’t over complicate your analysis. Keep your eye on a few important balls as they matter most. It is a message that I try to adhere to (my “critical variables”). It is also a similar message to the one I heard Jim Barksdale (of Netscape fame and a panelist at my Jackson, MS Market Forecast dinner earlier this year) say time and again – “keep the main thing the main thing”. With that solid advice from two extraordinary people, take a moment to consider a very simple technical analysis tool, the granddaddy of all technical analysis tools – the Dow Theory.
As the chart above* shows, there has been no divergence between the Dow Industrials and Dow Transports. To be sure, over the life of the current bull market there have been moments when a non confirmation** occurred for a while (mid to late 2006 is the most recent example) only to be confirmed a few months later.
Going into the current correction, the Dow Theory did not generate a sell signal. Moreover, when taken in conjunction with other simple yet important market indicators such as the moving averages (see blog entry of August 2, 2007), the only reasonable conclusion I can come to is that the correction we are in is…well, a correction and not the start of a bear market regardless of the angst of a potential recession or sub prime inspired contagion.
Investment Strategy Implications
There is comfort in numbers. Too often in today’s markets momentum “investing” takes the place of independent analysis and thinking. After all, careers can be wrecked by marching to the beat of a different drummer. Much better to stay close to the pack. It increases the chances of not getting fired for being too off the mark. Gotta keep that house in Greenwich.
I believe that this herd thinking is manifested in the record high correlations between and within asset classes. You see this in the willingness to surge then purge into and out of investment positions. For those with a contrarian bone in their bodies, this is a pattern that can and should be exploited. And something worth remembering should either Dow Theory components break to a new low anytime soon and the momentum lemmings jump off the cliff.
Thank you, Ralph, for many years of great advice and counsel. And thank you for your friendship. You will be missed but never forgotten.
*To view a larger version of the chart, simply click on the image.
**One index makes a new high or low while the other does not.