Transports at Crossroads

The Dow Jones industrial average slid Thursday but even after a 100-plus point drop it is less than 1% below its all-time closing high. That is why it's more concerning to some market watchers that the Dow Jones transportation average, which fell 1.4% Thursday and is now 5.6% below its all-time high set in May.

The Transports' relatively steep fall Thursday was paced by freight logistics firm Expeditors International (EXPD Quote) and came despite lower crude oil prices and strong earnings from Union Pacific (UNP Quote), which fell 0.5% nonetheless.

Thursday's action provides fodder to the bear camp (more on that below) and is no doubt disconcerting to those already fretting the Transports' failure to "confirm" the Industrials' recent string of record closes -- 26 since October. However, bulls claim a foothold in the market too.

"The Transports have been struggling -- there's a divergence between that and the [Dow] Industrials," says Jack Schannep, editor of TheDowTheory.com. The Transports "had a double top in May-June and another one here [with the November highs.] That's possibly a warning signal; it's worrisome."

The divergence between the Dow Transports and Industrials -- meaning they have not been hitting new highs in lockstep -- puts a "yellow light on Dow Theory" from a timing perspective, he says. However, a sell signal would not occur unless the Transports violate their December intraday low, which is just below 4500, and according to Schannep, "It ain't over till it's over."