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TAM's Morning Cup Of Jo: March 5, 2012

|Includes: SPDR S&P 500 Trust ETF (SPY)

"Whoooo are you? Who Who, Who Who?" - The Who

"William Peter Hamilton - anyone, anyone?" we ask as you hear nothing louder than sounds of crickets chirping in dead air. The ole adage of 'no one remembers second,' most certainly comes into play in this instance. Way back when, in the last half of the 19th Century, Charles Dow - founder & editor of the Wall Street Journal (WSJ) - wrote a series of over 200 editorials depicting six basic tenets on investing.

1. The market has 3 movements - Primary, Secondary and Minor

a. Each of which can be bullish or bearish

2. Trends have three phases - Accumulation, Directional and Speculation

a. The latter 2 can be bullish or bearish where accumulation is merely a channel (indecision)

3. The market discounts all news - a premise of the Efficient Market Hypothesis

4. Stock market averages must confirm (DJTA Adherence)

5. Trends are confirmed with volume

6. Trends are continuous until proven failed

After his death in 1902 another editor for the WSJ, named William Peter Hamilton, systematically organized Charles Dow's thoughts into a theory called… you guessed it... "The Dow Theory." {Not to be confused with TAM's 100-Year Market Theory & Dow Chart} All kidding aside, tenant number 4 is where our focus lays today - the confirmation of a secondary index. This, as far as the theory stands, is where the proverbial rubber truly meats the road. Most followers of the Dow Theory look at this tenant as the most important as it relates to confirmation of trend and measurement of risk. Essentially it states, "A move higher in the broader index (Industrials) must be accompanied (or immediately followed) by a move in the Transports." In Charles Dow's words, it exemplifies the underlying health of the economy. If this does not occur, and there is divergence, the move is likely short-term and will not last.

DJIA DJTA Comparison Chart

This, as far as we can tell, is the first topside (bullish) divergence we've seen since August 2007. So now the question is… "Is Charles (or William for that matter) correct?" Maybe, maybe not; it's all about the weight of evidence and stacking probabilities. Food for thought: We are, at least on the broader SPX, still contending with prior resistance points. Conversely, the short-term trend is bullish. By looking at tenant number 6… trends are continuous until proven failed, things are still ok. However, the difference is the market is in (based on the Dow Theory) a minor bullish phase not a secondary or primary. As for those, the market still remains within a larger non-directional accumulation phase. In English, there has been no confirmation of a change of cyclical trend since returning back into the longer-term channel set in 2011. Without this confirmation, market risk remains generally high.

Everyone loves to play the trend. It's fun and exciting - especially after the 2011 nightmare. So, to paraphrase our editorial today… "The trend is your friend until it's not. Warning signs are on the horizon a storm may be coming. Just don't wait until the last second to turn sail."

We hope this helps.