What You Can Learn from Europe's "Dow Theory"-esque Non-confirmation

By Brian Whitmer | European Financial Forecast editor

Charles Dow (yes, the one with the averages named after him) developed a foundational concept in technical analysis that requires that price movement in industrial stocks and transportation shares confirm one another.

The main condition for a Dow Theory non-confirmation occurs when one sector makes a new extreme absent the other. Its classic application is observing the position of the Dow Jones Industrial Average, an index of 30 "industrial" stocks, versus the position of the Dow Jones Transportation Average, an index of 20 "transportation" stocks. In essence, whenever one index fails to keep up with the other, in either direction, it suggests an impending reversal.

These concepts can be applied universally.

For example, right now over in Britain, the FTSE 100's divergence with the FTSE 350 Transportation Index just pushed to 29 months.

This is a far more prolonged Dow Theory non-confirmation than that seen in July 2007 (seven months) or December 1999 (17 months). In 1999, the FTSE 100 eventually collapsed 53%, while the FTSE 350 Transports fell 66%. In 2007, the resulting declines were 49% and 77%, respectively.

In our view, Britain's prolonged non-confirmation makes sense given a host of investor psychology and other extremes we've been tracking, not just in Europe but around the globe. If you want to stay up-to-date on our findings regarding the position of stocks and bond markets, currencies and the broad economic trends, check out some of our free must-read issues on www.elliottwave.com.

Are You a "Betting Man"? Then Take a Look -- and Make Your Bet.

By Murray Gunn | Global Rates & Money Flows editor

I have spent much of my career among professional traders. By nature, traders are a betting crowd; if they can't bet on the markets, they'll bet on something else.

A monthly highlight on trading floors was always the 'NFP Sweepstake,' where everyone would pay some money to guess what the U.S. Non-Farm Payroll (NFP) number would be. The winner, who would take the whole pot, was the guess that came closest to the actual number. A good strategy, therefore, would be to try and be either the highest or lowest number because, sometimes, NFPs do surprise.

That was the case last month when NFPs came in showing that 272,000 jobs were added in May compared with a consensus forecast of 185,000. Momentum in the U.S. labor market is waning, though. From January 2021 to December 2022 the average NFP number was 490,000 jobs added each month. From January 2023, the monthly average has halved to 241,000. The unemployment rate has increased from 3.4% in April 2023 to 4.1% now and jobless claims are rising.

The chart above shows annualized percentage change in those in the U.S. engaged in full-time employment. Full-time employment has been shrinking on an annualized basis since February this year, and you can see that every one of the eight recessions (the shaded areas on the chart) since 1970 has been accompanied by a negative reading. On three occasions, this metric has dipped into negative territory without a recession occurring.

I'm no expert bookie, but it seems to me that those odds tilt towards favoring a recession. What do you think?

The U.S. jobs market remains the most important economic variable on the planet given the importance of the U.S. consumer to economic activity. Regardless of where in the world you live or invest, staying ahead of the trends in the U.S. stock market and economy is worth your while. Elliott Wave International has a free must-read issue on U.S stocks that I suggest you check out, on www.elliottwave.com.