I’ve listened to scores of prognosticators interpret Dow Theory in a variety of different ways. However, all of them may agree upon one disconcerting reality; specifically, the year-long relative weakness in the Dow Jones Transportation Index could be cause for some concern.
While I do not believe in the semi-simplistic notion that the transportation stocks must lead the way for industrial stocks, I do pay attention when the iShares DJ Transports (IYT) lags the SPDR Dow Jones Industrials ETF (DIA). The best way to spot trends in that relationship is with the IYT:DIA price ratio.
At first glance, one notices that transportation stocks via IYT have not been weaker relative to the popular Dow (DIA) since November of 2009. Equally apparent, IYT had led the Dow higher for the first 18 months; however, the series of “lower highs” for IYT:DIA over the next 18 months demonstrates ongoing weakness for railroad, trucking, air freight and shipping.
The shift may not be all that surprising when we consider the nature of transporters. Most are taking raw goods, unfinished products and natural resources to other corporations… a sign that GDP may expand. Over the last year-and-a-half, however, global growth has waned; fiscal and monetary stimulus has only been modestly effective in reflating brand name stock assets, but less impressive at kicking global GDP into a higher gear.
The question remains, though, should a broader market investor care? If you tend to invest in the S&P 500 or Dow 30 via SPDR S&P 500 (SPY) or SPDR Dow Industrials (DIA), why should you fret weakness in transports, energy, materials and/or natural resources?
The previous 2 times that the IYT:DIA price ratio reached these depths (i.e., November 2009, October 2011), aggressive stock assets rallied significantly. Most of the global growth story “faves” — materials, transports, small-cap stocks, emerging market assets — rocketed higher.
In my estimation, if IYT:DIA begins to strengthen from here, we will see new intra-year highs for the S&P 500 and Dow Industrials. On the other hand, if IYT:DIA served up additional weakness in transports, global recession fears would likely trump recent psychological feel-goods like 1400 on the S&P 500 and 13000 on the Dow.
A sign of greater relative strength in IYT would likely indicate additional broader market gains to come, whereas more relative weakness in IYT would likely precede broader market sell-offs. It follows that, in spite of tepid volatility and low volume, investors may be sitting atop a pivotal point for the direction of the Dow.
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