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Double-Dip Recession? Dow Theory Says No!

Recent economic reports suggesting a double dip recession is likely are off base.

(Editor's note: Please welcome our newest contributor, Fred Meissner, CMT, past President of the Market Technicians Association and founder of The Fred Report).

Students of the market are familiar with Dow Theory, the first attempt by nascent technical analysts to forecast macro market trends. This theory was promulgated by Charles Dow, and says that when the Dow Transportations and Dow Industrials confirm one another a sustainable trend exists. While many other forecasting techniques have been developed over the years, Dow Theory still has merit.

One use of Dow Theory that we use is the relationship of the Transports and Industrials as an economic indicator. When the Transports are stronger than the Industrials, as they are now, it suggests that the economy is improving.

The opposite holds true as well. Possibly the best recent negative example of thisis the peak in 1998. Notice how the Transports peaked in 1998 and theIndustrials continued ahead into the 2000 period before the start of that bearmarket. Notice how, after that, the Transports moved to new highs in 2004,again ahead of the Industrials, and forecast an improving economy and stockmarket.

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We will use two ETFs to examine today's environment. These are the

SPDR Dow Jones Industrial Average

(DIA) - Get SPDR Dow Jones Industrial Average ETF Trust Report

(an ETF representing the Dow Industrials), and the

iShares Dow Transport

(IYT) - Get iShares Transportation Average ETF Report

(an ETF representing Transportations). Notice how, in the recent decline, the IYT has held above the February 2010 lows, while the DIA failed to do so.

We take this to be a bullish divergence, which suggests acorrection in an ongoing bull rather than the start of a new bear market. This divergencealso suggests that recent economic reports suggesting a

double dip recession

islikely are off base and rather we are looking at a pullback in an economicuptrend. As markets ebb and flow, so does the economy.

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On a stock level, we note that the Airline Index (XAL) corrected from mid April to early May and has since moved to a new high. There are several attractive stocks in that group.

Our favorite would be

Alaska Air

TheStreet Recommends

(ALK) - Get Alaska Air Group, Inc. Report

, at new highs for 2010. Less favored is


(LUV) - Get Southwest Airlines Co. Report

, whichmade a peak in April. We would rate this a technical hold. In theparcel/freight area,


(UPS) - Get United Parcel Service, Inc. Class B Report

, on a technical basis, is more attractive than


(FDX) - Get FedEx Corporation Report

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Disclaimer: The charts and comments are only the author'sview of market activity and aren't recommendations to buy or sell anysecurity. Market sectors and related ETFs are selected based on hisopinion as to their importance in providing the viewer a comprehensive summaryof market conditions for the featured period. Chart annotations aren'tpredictive of any future market action rather they only demonstrate theauthor's opinion as to a range of possibilities going forward. More detailedinformation, including actionable alerts, is available to subscribers at

Fred Meissner is founder and publisher of

The Fred Report

. Fred is a CMT and past President of the Market Technicians Association (MTA). He recently left Merrill Lynch's Market Analysis Department and Sector Strategy Department to form The Fred Report.  A detailed bio is here:

Fred Meissner