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Dow Theory

September 22, 2010 – 5:39 pm

After a breakout day on Monday the indexes have stalled and are trading lower today. Do not mistake this weakness for the next big leg down. The market is simply overbought and needs to take a breather. The market has done nothing but go up for the month of September, a historically bad month for equities, and as we say from time to time, “no tree grows to the sky.”

Although short term negative volatility is probable, the recent surge in buying interest is compelling. As the double-dip recession scenario comes off the table, stocks should grind higher. Ancillary shocks to the system are always possible, but those odds are remote at this time.

I am a fan of the Dow Theory, which a portion of the thesis states that transportation indexes must lead the markets; otherwise the move in the averages is not confirmed. So keep an eye on the transportation ETF IYT to see if the current trend is poised to continue or fade out.

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