By: Craig Griffin, President

Over the last 24 years I have studied Dow Theory through the great Dow Theorist, Richard Russell and his “Dow Theory Letters.” During this period we have experienced two major bear markets for stocks, one that began in 1999 and the second in 2007.

There are many aspects to Dow Theory but what I want to speak to today is a phenomenon that occurs when the Dow and the Transportation average diverge from each other in depth (point decline) and duration (time lapsed from last high) after reaching new highs. A combination of depth and duration has signaled previous bear markets and I believe that the divergence we are seeing today mirrors that of 1999 and 2007, and that we could be headed towards a major downturn in the stock market.

First let’s visit the year 1999, just before the bursting of the dot.com bubble, which sent the Dow and the rest of the stock market into a full fledged bear market. The Transports peaked on May 12, 1999, at 3,753.50. The Dow Jones Industrial Average hit its peak three months later on August 25, 1999, at 11,326.04. The Dow then began to decline in earnest finally reaching a bottom on October 9, 2002, at 7,286.27… a drop of just over 35%.

On August 25, 1999, the day the Dow hit its top, the Transports were trading at 3,309.25. So if we take the May 12th peak for the Transports of 3,753.50 and subtract the August 25 close of 3,309.25 (the day the Dow hit its high) we get a drop in the Transports of 444.25, or 11.84% over three months.

So just prior to the stock markets entrance into a major bear market, the Transports peaked three months prior to the Dow, with a percentage drop of 11.84% over that time frame.

Although, a Dow Theory bear market had not been signaled, the hand writing was on the wall, yet very few saw it.

What about the Great Recession of 2008-2009 and ensuing bear market for stocks?  Was there a warning that the market may be teetering on cusp of a bear market for stocks before the recession actually began in December 2007? You bet there was!

On July 19, 2007, the Dow Jones Transports topped out at 5446.49. The Dow peaked almost three months later, on October 9, 2007 at 14,164.53.  On that day the Transports had dropped to 4986.73, a drop of 444.25 points or 8.44%.

Again, those of us who had been following Dow Theory saw the hand writing on the wall, and a monster bear market for stocks set in sending the Dow down to 6547.05, a loss on the index of over 53%.

What does the recent past say about our current situation? The Transports hit their last high on December 29, 2014 at 9217.44, and have not risen to new highs. Since then the Transports have turned down significantly, as of this writing they are down 581.54 points to a close of 8,635.90 on April 1, 2015, a loss of 6.31%.

At this point we don’t know if the 18,288.63 high reached by the Dow on March 3, 2015 is the final top for the Dow, but if we use March 3rd for comparison, the divergence of the Transports had already been going on for over two months (long in duration) with a percentage decline of just 1.73% (not deep).

However, if we measure the depth and duration as of April 1, 2015 the duration is over three months old, longer than the 1999 period. The 581.54 point drop of 6.31% during this timeframe is not quite the 11.84% drop that occurred in 1999 or 8.44% in 2007 but in my opinion, it is significant and dangerous!

The Transports did come very close to closing above the December 29, 2014, high of 9217.44, closing at 9148.13, on March 20, 2015. So the Transports came within a measly 69.31 points from confirming new highs hit by the Dow which would have been a confirmation of the bull market. The fact that the Transports came so close to breaking its old high on March 20th but failed is a big negative in my eyes!

The Transports were warning us in 1999 and 2007, and I think it is wise to take note of the signs being given today!

In summary, although a Dow Theory bear market signal has not been given yet, it has been over three months since the Transports hit its last high. Remember, I pointed out at the beginning of this piece that the Transports diverge from the Dow just about three months prior to the bear market that set in, in 2000 and the Transports turned down almost three months prior to what became known as the Great Recession, which began in December of 2007.

Are the Transports again warning of a coming bear market for stocks? We will only look back in history and know that for sure, but I feel like we are as close as we have been to a major collapse since the stock market bottomed on March 9 2009!

Recessions and bear markets for stocks are as natural as sun rises and sun sets. In other words you can count on their occurrence. Unlike the rising and the setting of the sun they are much more unpredictable.

During times of economic and market turmoil smart money turns to real money, gold and silver. However, timing is everything and those who saw the hand writing on the wall and acted before everyone knew what was happening benefitted most.

So remember, as I always say, “It would be foolish to acquire gold for the short term but it would also be unwise not to own some gold for the long term!”