Update on Dow Theory. Somebody posted a research paper on the Dow Theory the other day. In short it says Dow Jones Industrial and Transportation index need to confirm each other. We are in one of the largest (if not the largest, be conservative) divergence at this moment. DJIA is going higher. 13K level has only been seen in 2007 (and early 2008) in history. How about DJT? It is going lower since the beginning of this month, and it is still pretty far away from the highs. In fact it is below the 50 day moving average.
Why will this happen? I am seeking answer too. I guess it is because of the EURO crisis. Lots of money managers either in Europe or with international orientation are relocating to manage risk. Econ data are not too bad to exit equity, while currency risk is getting higher. They moved their investments to US equity. This explanation could also explain Dow 30 is always leading. DJIA (large 30) > SPX (large 500) > WLSH. In a uncertain market, large cap help to preserve value. DJIA is so well know that if in hurry, people just go long these names. I observe name stock outperform as well. Apple is a big winner. Per the annual meeting material this morning, there are 216 funds holding AAPL shares.
In general this rally is not a typical one that I want to participate. The euro crisis broke lots of correlation. The market is getting low degree of predictability. In history if a divergence occurred, a correction to due. Usually it is to the down side.
Where the correction could be? Last night Doug Kass made an interview with CNBC. He is calling for a 5-6% correction. My calculation, it is 1300. They also discussed the missing volume. Pete says it's option market holding more vol. Instead of selling the stocks they are holding, people buying puts to hedge. Evidence, yesterday 1m spy puts were bot.
ZH reports, "Following Abysmal 2011, Only 10% Of Hedge Funds Are Outperforming The S&P In 2012"
As we discussed, the first month of 2012 is another dumb bull market. It is not easy to beat market if you are doing active management. 2009 is a good example for us. What's the famous word again? Buy the F...ing Dip (btfd). Lots of money managers missed 1330 to now. I guess they are herding to buy badly if there is any correction. I think Kass' number makes sense. My plan is to turn on DCA once we see the correction.
ADD: 1 thing need to know about Doug
Doug Kass is probably the last trader to be a bear. In late Dec he called for SPX all time high in 2nd half of 2012. I forgot his number, but definitely over 1520. After the past 2 months, I guess people are getting more serious about this call.
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