Investing.com -- A key technical market signal turned bearish for the first time since mid-2023, marking a potential change in sentiment following a strong run in equities.
According to the Sevens Report, Dow Theory flipped to a bearish signal on March 14, ending a bullish stretch that began in July 2023.
The shift came after both the Dow Jones Industrial Average (DJIA) and the Dow Jones Transportation (DJT) confirmed new technical downtrends.
The DJIA logged a “lower low” on the weekly chart after forming a “lower high” in late January. That followed the DJT’s similar pattern completed two weeks earlier.
“A bearish reversal in Dow Theory effectively means that the bull market off the October 2022 lows has either ended or is in the process of ending,” the report said. While the S&P 500 remains near multi-week highs, the signal implies rising downside risks as macro uncertainty builds.
Dow Theory, one of the oldest technical frameworks in market analysis, requires both Dow averages to move in tandem to validate a trend.
The system has a reputation for lagging but historically offers “a relatively high conviction bullish or bearish call for the primary trend in the stock market once a reversal is ‘confirmed’,” Sevens Report explained.
The July 2023 bullish reversal, which kept investors long through a period of heightened uncertainty, coincided with a ~25% rally in the S&P 500. That move has now run its course, according to the framework.
Importantly, Sevens Report stresses that the signal is not just a technical indicator. “If everything is priced in and both the Dow Industrials and Dow Transports have or are in the process of falling into technical downtrends, then the economy is very likely already in contraction and falling into recession, based on history.”
While the Dow Theory flip doesn’t rule out new highs in the near term, it underlines the need for caution.
The report points out that the indicator is “not something to dismiss as another sensational and over-hyped technical signal,” especially in the context of ongoing macro risks, including a persistently inverted yield curve.