Transports at Crossroads

Not only is it not over, "there is no divergence," counters Louise Yamada, director of technical research at Louise Yamada Technical Research Advisors. "There is no rule in Dow Theory as to which average moves to a new high or low first; and Dow Theory is not a day-to-day or week-to-week observation. [It's a] much longer-term time frame."

From her perspective, the roughly five-month period between the Dow Transports' all-time high in May and the Dow Industrials' record close in October is plenty close and means "you have Dow Theory confirmation." Furthermore, the Dow Transports have maintained an uptrend since the August lows and "you're probably on your way to surpassing the May high [after the current] period of consolidation," she says.

Where Schannep and Yamada agree is that there's been a rotation in and among components of the Dow Transports, preventing the index from making a new high in conjunction with the Dow Industrials. Yamada believes the rotation is mainly a function of the funds having to be fully invested. "They run something up and sell it," she says. "You get this constant rotational behavior, which is frustrating for everyone."

Airline stocks, for example, are being whipsawed by industry consolidation, highlighted by US Airways' (LCC Quote) unsolicited offer for Delta (DALRQ Quote), and some dramatic moves in fuel prices. But on the other hand, 2006 the first profitable year since 2000 for AMR (AMR Quote), parent company of American Airlines; Continental Airlines (CAL Quote) reported a narrower-than-expected fourth-quarter loss amid record passenger loads; and UAL (UAUA Quote), which owns United Airlines, is optimistic about 2007 after having dramatically improved its cash position.