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Dow Theory - Any Comments?


JEast
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Just seeing if any old school folks are out there in the hinterlands.  If so, found the recent divergence in the Dow Jones and the Transports interesting.  Maybe this is just the money being pushed into the big caps with QE.

 

http://s7.postimage.org/jkknd9hln/Screen_Shot_2012_10_04_at_1_54_02_PM.png

 

 

Cheers

JEast

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JEast,

 

I pay attention to transport a bit due to my investment in SSW.

 

If you look at the same chart from 2000 you see the transports are +70% whereas the Dow is +18%.  This makes sense to me given the positive impact that globalization has had on international trade fulfillment.

 

Shipping is getting killed due to oversupply right now, so that's reflected in here someway somehow, but I don't think it's the major contributor.

 

My guess is that the bigger impact to this is the American consumer's appetite for discretionary spending.  Today, demand is weak and demand growth is also sluggish, so the market is reflecting that when pricing these transportation businesses.  Longer-term the demand will recover, either because the deleveraging trend will come to an end, the population will grow, the population will become richer, or a combination of all three.  It's just when and to what degree.

 

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JEast,

 

I follow it the transportation sector quite a bit because of my day job.  I also read Jeff Saut from Raymond James every monday (link below), here is what he had to say this week on this subject.

 

Adding to the angst has been the D-J Transportation Average (TRAN/4892.62), which has decoupled from the D-J Industrial Average (INDU/13437.13). Verily, since the June 4th low the Industrials are up roughly 11% while the Trannies are flat. This decoupling has become even more noticeable recently, causing many pundits to suggest there is a big decline coming for the Industrials. Last week Mark Hulbert, in his MarketWatch column, elaborated:

 

"The transports, as virtually everyone who is even slightly paying attention already knows, are seriously lagging the Dow industrials. It is widely assumed that this bodes ill for the stock market. But I am not so sure. A careful market analysis of the last three decades suggests that the Dow Jones Transportation Average is not the leading indicator that so many think it is.”

 

Now many argue that the Transports are a leading indicator because if companies are doing well the Transports will benefit from higher volumes to carry those goods to market. Others will opine that our economy is more service-based, and not as manufacturing-driven as it used to be, so the Transports don’t count. As an avid believer in Dow Theory, I am always watching the Trannies. Yet, the recent weakness, at least to me, is not yet concerning. I have commented that I think much of the weakness is attributable to the railroad stocks, which have been affected by the weather. First, it was the drought that hampered grain shipments; and then it was Hurricane Isaac. The “rails” have roughly 23% of their revenues tied to coal and grain shipments, so ex-Coal and Grain volumes are up around 2% quarter to date. The airlines have also come under pressure as fuel prices have risen. Regrettably, it is going to take a little longer before we see if the Transports’ weakness is a one-off thing, or a more meaningful event.

 

Interestingly, Mark Hulbert concludes:

 

“But here was where the real shocker came in: The correlations that I did discover for the Dow transports were inverse. In other words, the stock market over the last three-plus decades tended to perform better following periods in which the transports were weak rather than strong.”

 

Of course, this Industrials and Trannies discussion leads to thoughts about to Dow Theory. Therefore, it would not surprise me to see the Transports break below their June 4th closing low of 4847.73 while the Dow stays above its June 4th closing low of 12101.46. That would represent a downside non-confirmation and should result in a re-rally for the equity markets. For the record, to render a Dow Theory “sell signal,” at least by my method, would require both averages to close below their respective June 4th closing lows.

 

Link: http://raymondjames.com/inv_strat.htm

 

Hope that helps.  I don't have an opinion one way or another, but I don't think it's a smoke signal. 

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