Dow Theory: Transports Not Confirming Industrials

One of the elements of Dow Theory is that the Dow Jones 20 Transportation Average (DJTA) should confirm new highs in the Dow Jones 30 Industrial Average (DJIA). When this fails to happen, it is a bad sign for the market. The logic behind this is that, if industrial company stocks are doing well, the companies will be ordering raw materials in anticipation for future sales, which will be transported by the transportation companies, in turn causing the transportation stocks to benefit.

247Bull.com Editor: North American railway operator, Norfolk Southern, together with the delivery companies UPS and FedEx, have all issued profit warnings in recent weeks. FedEx not only cut its guidance for the full year, it also spoke very cautiously about the outlook for the slowing global economy. All three of these companies are components of the Dow Jones Transportation Average and the fact that they are hurting financially should be a red flag to the bulls.

The two charts below show that the DJTA has not confirmed the new highs in the DJIA all this year. Whereas the DJIA has continued to push to new highs, the DJTA has stalled and moved sideways.

 Dow Jones Industrial Average

chart-1-614x35011

Dow Jones Transportation Average

chart-2-11-614x350

The internals behind this divergence are even worse than revealed by price. Each chart has a panel showing the percentage of stocks in each price index that are above their 200-EMA. Note that the percentage for the DJIA is near 90%, while it is only 20% for the DJTA.

When a stock’s price is below its 200-EMA, by our technical definition it is in a long-term bear market. With 80% of DJTA stocks in bear markets, the outlook for the DJTA is not good. And in accordance with Dow Theory, the prospects for the broader market are much worse than the new highs in the DJIA would imply.

Carl Swenlin | DecisionPoint.com

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