Simplespread

Once upon a time there was the Dow Theory. Besides observing that the market moved in waves like the tides of ocean, and that you could figure out which way the market and the tides were moving by watching whether each succeeding wave (washing upon the beach for the ocean and price movements for the stock market) was higher or lower than the previous one, it also watched whether the transporting side of the economy was in sync with the manufacturing side. It realized that if manufacturers were producing but transports weren't transporting, then trouble loomed down the road - like maybe consumers weren't buying. Also, it observed that if transports were transporting but manufacturers weren't producing, then trouble also loomed down the road - something was wrong with manufacturing. For a healthy economy, and a healthy stock market, both indices had to be in sync. If one made a new high, then the other should follow in like form. If they didn't confirm each other's moves, we had a non-confirmation, and that spelled trouble. Similar interpretations could also be made from confirmations and non-confirmation of lower lows. Confirmation of lower lows was bearish; non-confirmation was bullish.
As time passed, this type of reasoning morphed into the relationship of the Generals and the Soldiers. The Generals could be defined as the safest, Bluest of the Blue Chips, best-quality companies available. The Soldiers were everybody else. Theory had it that the Generals should lead and the soldiers should follow in normal circumstances. If the Generals led but the Soldiers didn't follow, then watch out below because investors saw trouble ahead and acted accordingly by putting their money into only the safest stocks. On the other hand, if the Soldiers got over-enthusiastic by jumping out ahead of the Generals, this was quite bullish because it meant investors had a strong faith in continued healthy conditions going forward. They were willing to put their money into the more marginal businesses assuming good times ahead.
Which brings us to today.
If you go strictly by Dow Theory, the Dow Jones Transports have been making new all-time highs since December 17, 2004 while the Dow Jones Industrials have languished below their 11,723 close set on January 14, 2000. Thus you have non-confirmations stretching over the past several years while the markets have traded both lower and higher. But why make your decision on whether 30 (the Industrials) stocks can outrun 20 stocks (the Transports) when there are literally thousands of stocks now in the game, and confirmation can be interpreted differently and more legitimately?
Why not consider the Dow Jones Industrials as the Generals, and NASDAQ or the S & P 500 as the Soldiers? It utilizes the theory of whether concentrated quality is leading the diffused riffraff or not better than today's Dow Theory, and gives us a better idea of confirmations and non-confirmations. Is everybody in sync, or not?
So, with the Dow Jones Industrials sitting today at 11,577, only 146 points under a new high, what should we be thinking as we begin business Monday morning? With the current Dow Jones Industrial Average divisor at 0.12493117, it means each of the 30 Dow Jones Industrial Average component stocks need rise only $0.61 to surpass the old high mark (30 stocks multiplied by $0.61 divided by 0.12493117).
Can that happen? Well, Duh!
Can it happen Monday? Well, Duh! again. A mere $0.61 per each of the 30 stocks in the Industrials? But then what? Besides the folks at Broad and Wall breaking out the champaign, and CNBC partying like it's 1999, what about the non-confirmation of the Soldiers still laboring at NASDAQ's current 2314 (well below the all-time high of March 10, 2000 at 5048) or the S & P 500's current 1325 (well below the all-time high of March 24, 2000 at 1527)?
So, as we approach a new all-time high for the Dow Jones Industrials, it will be significant. Hundreds of billions of dollars will be placed on the basis of interpretations of the numbers. If we turn down after making an all-time new high for the Dow Industrials but not NASDAQ and the S & P 500, it could the Mother of All Non-Confirmations of Soldiers and Generals, and if we turn down prior to making a new high on the Dow Industrials it will be the Mother of All Non-Confirmations for the Dow Theory.
Bottom line: We'd better not turn down until both Theories are confirmed, or else - hold on to your wallet.

Wall Street got surprised this week. On Wednesday, Cigna (CI), dropped 15% to $90 after reporting a 19% drop in earnings. On Thursday, Expediters International of Washington (EXPD), jumped 18% to $103.80, after reporting a 70% surge in earnings, announcing a 2 for 1 stock split, and a 46% increase of its dividend. But why was anyone surprised? EXPD has been a top performing stock in a top performing industry (Air Transport) since at least last October. CI has been a weak stock in the weakest sector (Heath Services) for months. Why anyone would have had money in CI when they could have profited from EXPD is a good question. Strong stocks get stronger; weak stocks get weaker. That's the way of the world. Why should anyone be surprised?

Metal & Mining remained in first place for the 5th straight week, and for the 22nd out of the past 26 weeks. Manufacturing should benefit from a continuing weak dollar...unless foreign investors decide to dump dollar-denominated assets en masse. Electronics has good looking charts in various areas. Transportation continues strong, moving the freight and people. Companies have either learned to hedge their fuel needs (hopefully) or are able to pass along increased costs without it affecting their operations. Aerospace/Defense continues its run. How can the geopolitical news be anything but positive for this group? Leisure's strength is concentrated on gaming activities and selected Restaurants. Automotive owes its strength to foreign manufacturers. Energy has become captive of geopolitical news bites. Stocks certainly remain positive in their price movements. Consumer Durables tags along with Electronics as the only two sectors in THE TOP TEN which have failed to make new all-time highs. Conglomerates have had a good year after writing off 2005 as basically flat..

It's interesting to note that according to the theoretical models of how each sector should act during stock market and economic cycles, we see that at the peak of a bull market run, while the economy is still expanding, both Precious Metals and Energy should be the leading sectors. And that's just what we've had over the past 9 months.
So, while we luxuriate in easy profits recently from Energy, Metals & Mining, and Transportation, let us keep our eyes on Utilities, Drugs, Health Care, Food & Beverage, and Tobacco for any stirring of a defensive posture by investors. Remember, there is always a Bull Market, and that's where Simplespreaders should always be.

As you can see from the table below, there are practically no opportunities available to Simplespreaders at this time. Everything is extended well above buying areas. Positions initiated previously at lower prices should either already be closed out profitably or looked at carefully to see whether the risk/reward metric merits holding them any longer.

Sector	05Novt05 to 05May06	Week of 05 May 06	Option Stocks	Strong Option Stocks	Strong Option Stocks Near Buying Area
Metals & Mining	+51.5%	+4.97%	89	75	4
Manufacturing	+33.9%	+3.48%	65	40	0
Electronics	+27.3%	+3.11%	206	123	6
Transportation	+27.0%	+5.42%	63	20	0
Aerospace/Defense	+24.6%	+3.14%	21	21	0
Leisure	+23.6%	+3.05%	62	29	2
Automotive	+22.6%	+3.52%	30	9	0
Energy	+21.5%	+3.09%	154	62	5
Consumer Durables	+21.3%	+2.18%	46	16	1
Conglomerates	+18.4%	+3.46%	17	10	0
AND THE REST...
Materials & Construction	+17.7%	+1.26%	56	The Residential Homebuilders look worse and worse. Their weakness very well may bring down the rest of the sector.
Banking	+17.5%	+1.46%	91	Foreign and Money Center banks share the spotlight here. Regional US banks aren't doing that great.
Computer Hardware	+16.7%	+2.13%	55	Like all things hi-tech, trying to claw its way back, and doing a fair job of it.
Chemicals	+16.5%	+3.36%	42	Led by Synthetics and Agricultural Chemicals, this sector made it into new high ground this week after breaking out of an a4-month consolidation..
Financial Services	+15.7%	+1.29	245	It should come as no surprise that the biggest names on Wall Street are benefiting from record volume and a strong run-up in prices.
Telecommunications	+14.6%	+1.78%	133	Still putting in a weak showing. Last time in the sun = early 2004.
Real Estate	+14.4%	+0.68%	64	The past several months have witnessed a marked selloff in most of the REITs. Only a meager recovery from the bombed-out Mortgage side of the business has kept this sector from falling through the floor.
Consumer Non-Durables	+13.7%	+0.88%	71	Moving slowly, as defensive issues always do. Their poor performance is one of lack of momentum rather than adverse price action. Watch for any strengthening as a sign of market tops.
Specialty Retail	+11.9%	-0.85%	65	Barely bettering its 2005 top puts it way down the list. It's interesting that pawn brokers have helped keep this sector in the positive. Not much here to excite anyone.
Utilities	+10.7%	+2.53%	74	Another bear market hedge that has performed poorly since topping out last fall. A good week pushed this sector into new high ground. Put in very good numbers for most of 2004 and well into 2005.
Dow Jones Ind. Avg.	+10.6%	+1.85%	-	The series of higher highs and higher lows has the Dow close to its all-time high.
Diversified Services	+10.1%	+0.42%	118	A hodgepodge of business services with strong areas balanced out by weak areas.
Computer Software & Svcs	+9.9%	+0.28%	142	One of the better bounces coming off the 2002 bottom, has lately run out of steam.
Food & Beverage	+9.8%	+2.02%	44	Selected breweries are about the only thing working here. Keep your eyes on this sector for strength indicating weakness the rest of the market.
Insurance	+9.8%	+1.00%	69	Life insurance is on a tear, but other than the pop after the fall storms last year, this sector has been dead in the water.
Retail	+9.4%	+2.57%	66	Dullness affects the whole sector.
Tobacco	+9.3%	+1.77%	8	Like Consumer Non-Durables above, the price appreciation is respectable but just lagging so many other sectors.
Drugs	+9.2%	+0.37%	200	Biotechnology last year, and smaller Drug companies this year are the only bright spots in this sector going back over 3 years. All in all, a total disappointment, plus various laws suits don't help. But this sector can be a good bear market hedge...if it comes to that..
Wholesale	+9.0%	+0.61%	50	Paced by industrial and building stocks, but held down by food, drug, and electronics, this sector has barely kept up with the market.
Media	+8.6%	+1.31%	70	The sector is going through the biggest upheaval of them all when it comes to business models. And it's reflected in stock prices. Great upside potential if and when things get sorted out, and a very real potential recovery during the next market cycle. But we aren't there yet.
Internet	+0.6%	-0.29%	70	So the internet revolution is here, but where are the stocks? Nothing can match this sector for explosive price growth when they get up a head of steam, but that hasn't happened recently. Last good run = November to this past March. Can swing into action at any time. Definitely deserves to keep an eye on.
Health Services	-1.59%	-1.48%	142	Not only worst performer over the last 6 months, but suffers an actual price decline of about 8% since the highs in January. Ugh! No bright spots or even good potentials. The sector has a lot of work to do to right itself. And when it does, few other sectors can rival the profit opportunities.