Transports: A Dow Theory Warning Sign?

Mark Hulbert MarketWatch February 7, 2012

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Feb. 7, 2012, 12:23 a.m. EST

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By Mark Hulbert, MarketWatch

CHAPEL HILL, N.C. (MarketWatch) "” Just when you thought that it might be safe to get back into the stock market...

The fly in the ointment this time: The Dow Jones Transportation Average /quotes/zigman/627450 DJT -0.10% is seriously lagging.

This is potentially worrisome from at least two different points of view. First, the Dow Theory, the oldest market timing system still in widespread use today, keys off the behavior of the Transports and the Dow Jones Industrial Average /quotes/zigman/627449 DJIA +0.23% . Joint new highs are considered evidence of a healthy bull market, while divergences are considered a warning sign of trouble.

/quotes/zigman/627449 DJIA 12,875.17, +30.04, +0.23% /quotes/zigman/627450 DJT 5,328.83, -5.42, -0.10%

Regardless of the Dow Theory, furthermore, the Dow transports is thought by many to be a leading economic indicator "” on the theory that companies in the transportation sector are a particularly sensitive barometer to how the economic winds are blowing. So weakness, even if it's just relative weakness, could be hinting at bigger problems down the road.

On both counts, it behooves us to take a close look at what is going on.

First, the numbers. Last Apr. 29, the Industrials hit a bull-market closing high of 12,810.54. While they came close to eclipsing that level in July "” getting as close as 12,724.41 "” it was only last Friday, more than nine months later, that this average finally broke above that level to reach a new bull-market high (closing at 12,862.23).

Significantly, and perhaps ominously, the Transports behaved differently. Though they also reached a bull-market high on Apr. 29 (of 5,514.87), it didn't take them long to rise even higher. That came in early July, when they proceeded to get as high as 5,618.25 on a closing basis. They then entered in a prolonged correction, and today remain below their July high.

Click to Play $(function () { $("#video_00000000-0000-0000-0000-000000000000").click(function (e) { e.preventDefault(); MarketWatch.Video.loadAndStartVideo('00000000-0000-0000-0000-000000000000', 'video_00000000-0000-0000-0000-000000000000', '287', '162'); }); }); U.S. stocks decline on Greek austerity fears

U.S. stocks declined, giving pause to the recent rally, as investors shifted their focus to wrangling in Greece over fiscal austerity.

And not by just a little bit, either. Instead, they are more than 5% below.

What does it mean?

Frustratingly, not all Dow Theorists agree on an answer. In fact, two of the three monitored by the Hulbert Financial Digest "” Jack Schannep of TheDowtheory.com and Richard Moroney of Dow Theory Forecasts "” think the appropriate point of comparison is not last summer but late October. And because, near the end of December, the Dow averages rose above their late-October highs, both Schannep and Moroney believe that the Dow Theory is solidly in the bullish camp "” notwithstanding where the Dow transports might be relative to their July high.

In contrast, Richard Russell, editor of Dow Theory Letters, says he's worried about the Dow transports' weakness and, in part for that reason, is largely out of the stock market.

What about the notion that the Transports' are a leading indicator? As I reported late last July, there is some compelling statistical evidence pointing in that direction.

I should point out in that regard that my Jul. 22 column appeared at a time when the Dow industrials were trading around 12,700. In the two weeks after that column appeared, the Dow dropped some two thousand points. Read my Jul. 22 column "Transports' weakness as a leading indicator."

To be sure, I haven't come across any adviser who is arguing that the Transports' current relative weakness will usher in another market break of similar magnitude, even if they "” like Russell "” are worried. And we mustn't overlook the bullishness that two of the three Dow Theorists I monitor are insisting upon even in the face of that weakness.

Still, I imagine that more than a few bulls would breathe a lot more easily if the Dow transports were to join the Industrials in surpassing their previous bull market highs "” and will be biting their nails until and unless that happens.

Click here to learn more about the Hulbert Financial Digest.

/quotes/zigman/627450 Add DJT to portfolio DJT Dow Jones Transportation Average 5,328.83 -5.42 -0.10% Volume: 6.52M Feb. 7, 2012 2:25p var embeddedchart681836896Chart = new EmbeddedChart('#embeddedchart681836896', NormalChartStyleNoDecimals, 240, 80, '1dy', '5mi', null, null, null, 'US:DJT'); jQuery.data($('#embeddedchart681836896').get(0), 'embeddedchart', embeddedchart681836896Chart); /quotes/zigman/627449 Add DJIA to portfolio DJIA Dow Jones Industrial Average 12,875.17 +30.04 +0.23% Volume: 68.11M Feb. 7, 2012 2:25p var embeddedchart70394702Chart = new EmbeddedChart('#embeddedchart70394702', NormalChartStyleNoDecimals, 240, 80, '1dy', '5mi', null, null, null, 'US:DJIA'); jQuery.data($('#embeddedchart70394702').get(0), 'embeddedchart', embeddedchart70394702Chart); //$(document).ready(function() { var storywidth = $('#mainstory').width(); var maxwidth = storywidth; $('#maincontent pre').each(function (index, value) { var thiswidth = $(value).width(); if (thiswidth > maxwidth) maxwidth = thiswidth; }); var offset = maxwidth - storywidth; if (offset > 0) { var margin = 13; var blanketwidth = $('#blanket').width(); var contentwidth = $('#maincontent').width(); $('#blanket').width(blanketwidth + offset + margin); $('#maincontent').width(contentwidth + offset + margin); $('#mainstory').width(storywidth + offset + margin); } //});

Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.

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Mark Hulbert is editor of the Hulbert Financial Digest, which since 1980 has been tracking the performance of hundreds of investment advisors. The HFD... Expand

Mark Hulbert is editor of the Hulbert Financial Digest, which since 1980 has been tracking the performance of hundreds of investment advisors. The HFD became a service of MarketWatch in April 2002. In addition to being a Senior Columnist for MarketWatch, Hulbert writes a monthly column for Barron's.com and a column on investment strategies for the Journal of the American Association of Individual Investors. A frequent guest on television and radio shows, you may have seen Hulbert on CNBC, Wall Street Week, or ABC's World News This Morning. Most recently, Dow Jones and MarketWatch launched a new weekly newsletter based on Hulbert's research, entitled Hulbert on Markets: What's Working Now. Collapse

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On both counts, it behooves us to take a close look at what is going on.

U.S. stocks declined, giving pause to the recent rally, as investors shifted their focus to wrangling in Greece over fiscal austerity.

And not by just a little bit, either. Instead, they are more than 5% below.

What does it mean?

In contrast, Richard Russell, editor of Dow Theory Letters, says he's worried about the Dow transports' weakness and, in part for that reason, is largely out of the stock market.

What about the notion that the Transports' are a leading indicator? As I reported late last July, there is some compelling statistical evidence pointing in that direction.

Click here to learn more about the Hulbert Financial Digest.

Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.

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Mark Hulbert is editor of the Hulbert Financial Digest, which since 1980 has been tracking the performance of hundreds of investment advisors. The HFD... Expand

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Transports: A Dow Theory Warning Sign?

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