Market Comment


After a steady decline, the Dow Industrials now stand about 4.9% below their Aug. 2 all-time closing high. The Dow Transports are about 4.8% below their Aug. 1 high.

While those are modest declines, we are inclined to view the retreat as a significant secondary correction. A typical secondary correction retraces one-third to two-thirds of the preceding advance over three weeks to three months. The Industrials have retraced about 76% of their June-to-August advance, while the Transports have retraced 49%.

A breakdown below the June 24 closing lows of 14,659.56 in the Industrials and 5,990.79 in the Transports would not represent a bear-market signal. But such a breakdown would increase the likelihood that the market is suffering something more serious than a garden-variety correction, and it would likely trigger a surge in bearish sentiment.

The good news is that sentiment has already turned markedly more bearish. The percentage of bullish investment newsletters now exceeds the percentage of bearish newsletters by 21.7%, according to Investors Intelligence, down from 33.1% on Aug. 6. Historically, a jump in bearishness after a fairly modest decline has been an encouraging signal. For now, our buy lists have more than 94% in stocks.

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