Mark Hulbert: A Dow Theory sell signal?

CHAPEL HILL, N.C. (MarketWatch) � Did the Dow Theory generate an official sell signal earlier this month?

One of the Dow Theorists I monitor says, unequivocally, �yes.� The other two remain on buy signals.

Therein lies a story.

The one Dow Theorist who says a sell signal was generated by this oldest and most famous of stock market timing systems is none other than Richard Russell, editor of Dow Theory Letters. He wrote to clients over the weekend to deliver the bad news.

�The Dow Jones Industrial Average DJIA � recorded a high of 13,279.32 on May 1, 2012. This Dow high was not confirmed by the Transports. The two averages then turned down and broke below their April lows. This action confirmed that a primary bear market is in progress � it was a textbook bear signal.�

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It should be noted that it was nearly two weeks ago when the two Dow Averages broke below their respective April lows. So Russell�s announcement over the weekend was not exactly breaking news.

But Russell nevertheless believes that the Dow Theory sell signal he now detects is all the more significant precisely because he missed it initially, along with virtually all other Dow Theorists he monitors. He writes that his interpretation is �particularly valid because nobody seemed to notice it [the Dow Theory sell signal], nor did any analyst appear to be aware of it. I know of no analyst or advisor who stated that we had seen a primary bear signal!�

The other two Dow Theorists I regularly monitor � Dow Theory Forecasts� Richard Moroney and TheDowTheory.com�s Jack Schannep � would beg to disagree. The reason that it appears they didn�t notice the mid-May breaking of the April lows was that they didn�t consider the event to constitute a Dow Theory sell signal.

What would it take for these other two Dow Theorists to conclude that a sell signal had been triggered? Though the specifics of their answers are slightly different, in many major respects both agree that a sell signal will be generated only if one or both Dow averages, in their next major rally attempt, fail to surpass their previous highs, and then only if both subsequently proceed to break below their previous correction lows.

Both insist in the meantime that, per the Dow Theory, the most recent signal remains in effect until reversed. That means, they remind clients, that the Dow Theory remains on a buy signal.

Can the Hulbert Financial Digest�s performance monitoring help us resolve the dispute between these two bullish Dow Theorists and Russell? You be the judge.

The HFD has data back to the beginning of 2002 for three hypothetical portfolios that traded between an index fund and cash on these three timers� interpretation of the Dow Theory. Schannep is well in the lead for performance since then, followed by Moroney. Russell is solidly in third place.

Click here to learn more about the Hulbert Financial Digest.