Adam O’Dell | Wednesday, June 13, 2012 >>
The Dow today: 12,573.
Back in February the Dow Jones Industrial Average (DJIA) closed above 13,000. It appeared all signs were bullish. Mass media headlines were trumpeting the gains you could make.
Yet we refused to back down from our position that there is a monumental crash just around the corner. Despite all the “evidence” to the contrary, I knew the bulls were setting up for a fall…
I said as much to our Boom & Bust subscribers. Just days after the DJIA made its 41-week high, I told them about the “other” Dow Jones Average they should pay attention to: the Transportation Average (DJTA). It was pointing toward a more ominous future…
You see, the Dow Jones Industrial Average and Dow Jones Transportation Average were not moving in the same direction. When both Averages are making new highs, the stock market is healthy. The bullish trend in one sector confirms a bullish trend in the complimentary sector. But when the two averages diverge, it signals a pending momentum shift.
That’s what I saw in February.
The Industrial Average was strong and making new highs. But the Transportation Average was weak and well below recent highs, not confirming the bullishness. So, in February, I said: “If market indices are not moving in the same direction… change is in the air.”
The thing is, change can be in the air for some time before we see the result of that change. After all, you don’t turn a 200,000 ton cargo ship 180-degrees in a matter of minutes. It takes time.
Over the subsequent two months, the market seemed indecisive and just moved sideways. Though beneath the surface the market’s bulls and bears played a well-matched game of tug-o-war.
Then, after another month of trading, it eventually became obvious the bears would win this round. The selloff took both the Transportation Average and the Industrial Average down. From May 1st to June 1st the DJIA lost 9.2%.
The Dow today now confirms the bearish sentiment that the Transportation Average was pointing to months ago.
We stand to learn a valuable lesson from this. That is: don’t make investment decisions based solely on what the media says. Don’t become a raging bull just because the Dow Jones Industrial Average is moving higher. Instead, pay attention to the details no-one else is talking about. That’s what we do for Boom & Bust subscribers.
That’s how you invest profitably.