Boudreaux, a Cajun in his fourth year as a LSU Freshman, sat in his US Government class. The professor asked Boudreaux if he knew what Roe vs Wade was about. Boudreaux pondered the question then finally said, "That was the decision George Washington had to make before he crossed the Delaware "

From the 9th the tops on RSI were about flat even at the top on the 22nd.

Sept 2012 When the major trend is up, 60 minutes charts do not show negative divergences in most cases.

Nasdaq Summation on Tuesday was +2740This high level does NOT rule out a correction but after the

correction we should retest the highs. Turning down from a top below 2000 is where the market can really get ugly.

BOTTOM LINEThe DJIA and SP500 have made marginally higher highs, but the Dow Utilities Average has failed to confirm. We have seen such divergences before the 1987 crash, the 2000 Internet Bubble top, the2007 Real estate bubble top, and other notable major price tops. We don’t have to have a decline as big as those examples,but history says that the market is in trouble when the DJU cannot make a higher high. Gold and T-Bonds should benefit in the weeks ahead, as the stock market corrects toward a low sometimethis autumn. Retail gold ETF traders are still fleeing, and commercial bond futures traders are stocking up ahead of this presumedtrending move.

A Different “DowTheory”When a lot of people think of “Dow Theory”, they reduce it down tojust the simple premise of the DJIA and the Dow Jones TransportationAverage confirming each other, or not. This made sense way back whenCharles Dow first started writing about it more than a century ago. Inthat age, the “industrials” made stuff, and the “rails” (as the DJT was originally formulated) moved the stuff. Itwas all about stuff.Now we have an era when companies like Travelers Insurance and Verizon Communications are considered to be “industrials” even though they don’t really make stuff. And Southwest Airlines and JetBlue are considered transportation stocks, even though they move people much more than moving “stuff”.Our own examinations of the DJIA versus the DJT show that the divergences and confirmations are not as meaningful as a lot of people think. But the Dow Jones Utility Average seems to

give much better signals when it disagrees with the DJIA.The first chart above shows several instances of disagreement. When you see the DJIA making a higher high but the DJU makes a lower high, it is a condition worth paying attention to. And if the DJU bursts out to a higher high ahead of the DJIA, that too is a messageworth noting.We covered this in our last Report, but it is a big enough deal now to merit a repeated message. The DJU topped back on April 30, and it has yet to get back up to that level even though the DJIA did push ahead to a marginally higher high. The DJU appears to be serving as the canary in the coal mine, calling attention to problems ahead ofwhen those problems are felt in the DJIA. These messages in the past have led to important declines for the DJIA.Also showing trouble are the bond closed end funds (CEFs) traded on the NYSE. Their A-D Line is shown below, and after looking really strong most of the way since the 2009 market bottom, this group is now showing huge weakness. It’s true that these are not “operating companies”, but their signals for overall market liquidity are really important historically.

Other interest rate sensitive issues are also giving warning signs.The high-yield bond sector tends to be the most sensitive to liquidity,either good or bad, and so it can be a good place to look for signs oftrouble. There is not one standard index to watch for that sector, butthere are several products which invest in those instruments.We like to watch the Mainstay High-Yield Bond Fund (MHCAX)because it has a long track record, and behaves well. Right now, it is conveying the same message of trouble that we see in the DJU. The top chart on page 2 looks at MHCAX versus the SP500 on a weekly basis (which helps factor out changes due to fund distributions).When MHCAX is below its weekly 10% Trend, that tends not to be a good time for the overall stock market. It correctly signaled trouble all the way down from 2007 to 2009. It also told us about the troubles for the stock market in the summer of 2011. Now it is againbelow that EMA, and has just bonked against the underside of it as the SP500 has pushed to a slightly higher high.Bottom Line: The weakness that is already evident in certain sectors like utilities stocks and high yield bonds is telling us that there is trouble now for the overall stock market.

BILL GROSSTHE TIPPING POINT:Should Bond Investors Abandon Ship?If only I knew then what I know now: wikiHow, not experience or damage control school, is the best teacher. So, should bond investors abandon ship? And who to believe? The captain of the Fed, the co-captains of the USS PIMCO, or just trust your instincts? Well there is no wikiHow moment to guide you in this case, although it’s true that yours truly, PIMCO, and the bond market have sailed some rough seas over the past few years. So has Chairman Bernanke. We’re all in this one together it seems. Immediate analysis of the past 6 weeks’ market action would argue that in late April, both the Fed and PIMCO observed that bond markets were approaching a tipping point. Yields were too low, prices too high, both for investors’ and the economy’s own good. The Fed’s Jeremy Stein had written a research paper outlining the risk. I, in fact, had written a March Investment Outlook outlining Governor Stein’s paper, and to be fair, PIMCO had been warning of high seas for what seems like an eternity. “Never,” I tweeted, “have investors reached so high for so little return. Never have investors stooped so low for so much risk.” True enough, history will likely record.

It will also record however, that the risk was not only in narrow credit spreads and emerging market debt/equity markets but at the heart of the credit system itself: U.S. Treasuries. What supposedly old salts like yours truly didn’t suspect was that all bonds, and yes, equities too were at risk of heeling over based upon a rather perfect storm, one that forecasters everywhere found difficult to fathom.

Well where does the ship go from here? Should you as a bond investor jump overboard and risk the cold money market Atlantic Ocean at near zero degrees? We don’t think so – and not because we want to keep you on board – we just don’t think so. Why not?

1) The Fed’s forecast of the economy which prompted tapering panic is far too optimistic. If 7% unemployment is tapering’s final port of call, we simply think that we’re much further away than the Fed’s compass would suggest.

2) Inflation, according to the Fed’s own statistics is running close to a 1% pace. The Fed has told us that they “target,” “ target” 2% and for the next 1–2 years are willing to accept even 2½% until they reverse engines. Fed Governor Bullard of the St. Louis Fed was in our opinion correct where he dissented from the majority decision several weeks ago, citing the distant shores of 2%+ inflation and the seeming inability to even move in that direction.

3) Yields have adjusted by too much. In any case, if frontend curves are up to 50 basis points cheap, then intermediate curves – the 10-year Treasury – may be as much as 35 basis points too cheap. They belong in our opinion at 2.20% instead of 2.55%.

So there you have it, fellow passengers and paying clients. Don’t jump ship now. We may have reached an inflection point of low Treasury, mortgage and corporate yields in late April, but this is overdone. Will there be smooth sailing tomorrow? “Red sky at night, sailors delight?” Hardly. Will you be able to replicate annualized returns in bonds and stocks for the past 20–30 years? Hardly. Expect 3–5% for both. But sailors, don’t panic. And like wikiHow suggests, if you see someone that’s afraid, “yell at them!” Yell, “This ship’s going to make it to port,” Fed, PIMCO, and PIMCO co-captains willing. Those icy Atlantic money market waters are likely to be with us for a long, long time. Have a cocktail, tell the band to stop playing dirges, because you’re gonna be just fine.