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Sunday, February 28, 2016

Opinion: What the curiously strong Dow Transports say about stocks

Opinion: What the curiously strong Dow Transports say about stocks

By Mark Hulbert

Published: Feb 17, 2016 5:24 a.m. ET

The Transports and the broader Dow Industrials are diverging, which is a bullish sign

CHAPEL HILL, N.C. (MarketWatch) — One of the most bullish sub-surface developments in the stock market is the surprising strength of the Dow Jones Transportation Average.

Whereas the broader Dow Jones Industrial Average DJIA, -0.34% has fallen 1.6% in February, the Dow Transports DJT, +0.48% are sitting on a 4.4% gain. (See the chart at the top of this column.) It’s unusual for a divergence this large — 6 percentage points — to materialize over so short a period.

One reason this divergence is bullish: The Transports tend to be a decent leading indicator. A recent case in point came in mid-December: That’s when I wrote that the Transports were “unusually weak.” As we know now, the broad market at that time was about to suffer a 10%-plus correction.

This is just one data point, of course, but there is more systematic evidence that supports the notion that the transportation sector is a good leading indicator. Consider a study conducted by the Bureau of Transportation Statistics in the U.S. Department of Transportation, titled “The Freight Transportation Services Index as a Leading Economic Indicator.” The study’s authors concluded that this index over the past three decades “led slowdowns in the economy by an average of four to five months.”

Another perspective on the Dow Transports come from the Dow Theory, the oldest market-timing system that remains in widespread use. Dow Theorists believe that the market trends most likely to continue are those in which both the Dow Industrials and the Dow Transports are participating. Divergences, known as “non-confirmations” in Dow Theory parlance, indicate a possible change in trend.

To be sure, the last two weeks’ divergence will need to persist for some time longer in order to persuade the Dow theorists I monitor to issue a “buy” signal. Both Jack Schannep, editor of, and Richard Moroney, editor of Dow Theory Forecasts, remain bearish for now, for example.

In the meantime, though, pay close attention to the Dow Transports. If they continue to outperform the Dow Industrials, you should give an increasing benefit of the doubt to the bullish case.

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