Transports Show Signs Of Fatigue
The Dow Jones Industrial Average has reached fresh all-time highs in recent trading. But the latest highs in the Industrials have not been confirmed by the Dow Transports, which peaked on March 14 at 6,281.24. While it is premature to panic about the Transports' lack of recent confirmation, persistent divergence would likely put the brakes on the current rally.
Transports hold the key
While the Dow Industrials typically get most of the attention from investors and the media, the Dow Transports play a vital role in determining the market's health.
Transportation companies — shippers, truckers, railroads, and airlines — are especially sensitive to the business cycle, which is one reason the Dow Transports assume equal importance with the Dow Industrials when it comes to Dow Theory analysis.
Indeed, an important tenet of the Dow Theory is confirmation. If a rally is to be sustained, both the Dow industrials and Transports must confirm one another in moving higher. Divergence between the two averages represents a potential yellow flag.
To be sure, the Dow Transports posted big gains in a relatively short period of time — the Average increased 28% from mid-November to March 14, nearly twice the gain of the Dow Industrials — so a breather for the Transports is not surprising.
Furthermore, the Dow Theory does not require confirmation between the averages on a daily, weekly, or even monthly basis.
Still, with a market that seems overdue for a pullback — and with important Transport component FedEx ($97; FDX) lowering its earnings guidance and missing profit estimates for its February quarter — the nascent divergence between the Industrials and Transports bears watching.
If the market corrects, investors should expect to see both the Industrials and Transports retrace one-third to two-thirds of their advances since mid-November. A two-thirds decline would drop the Industrials and Transports close to the 13,200 and 5,350 levels, respectively.
How the Dow Averages, especially the Transports, rebound following any correction will go a long way toward determining whether the market's primary trend remains bullish.
The resiliency of the market will be put to the test in the next few weeks as companies start announcing first-quarter profits. With expectations for Transport stocks on the high side — analysts expect the 20 Transports to post average profit growth of more than 20% this year — there is not a big margin for error. Subscribers should watch the averages while maintaining mostly invested portfolios. Our buy lists have 94% to 98% in stocks.