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What the Dow Transports Are Trying to Tell Us

The bull is not immediately doomed by the continued failure of the Dow Transports to eclipse their old highs, but we ignore the disconnect at our peril.

It’s getting harder and harder to excuse the Dow Jones Transportation Average’s failure to eclipse their September 2018 all-time high. What’s it trying to tell us?

It’s not as though the Dow Transports haven’t tried. As you can see from the accompanying chart, there been as many as six rally attempts over the past 15 months in which they have gotten to within shouting distance of their previous high. But in each case they failed.

Hulbert Chart

There are at least two reasons their failure is of concern. The first comes from the Dow Theory, which is the oldest stock market timing system that remains in widespread use today. At the risk of oversimplifying, that theory holds that a healthy bull market is one in which both the Dow Industrials and Dow Transports are jointly hitting new highs -- and that the failure of one to join the other in new-high territory represents a potential shift in the market’s major trend.

The second reason investors should be concerned: The transportation sector is a leading economic indicator, often turning down before the economy itself. This makes sense, of course, since the sector -- especially freight transportation companies -- should be among the first to detect imminent economic weakness.

It’s always possible that the Dow Transports’ will soon do what they have failed to do over the past 15 months. As this is written, they are 6.1% below their all-time high, and it’s entirely possible that a strong week or two would do the trick.

But, judging by the stock picks of the top-performing newsletters I follow, that seems like a long shot. Of the 20 stocks that make up the Dow Transports, just seven are currently recommended for purchase by even one of those top newsletters. To appreciate how tepid these top performers’ opinion is of the Dow Transports, consider that, of the 30 stocks in the Dow Jones Industrial Average, 28 are held in at least one of the top performers’ portfolios.

This is the same situation as existed in September, when I last devoted a column to this subject. Since then, the Dow Transports have gained 3.8%, versus 4.4% for the Dow Industrials and 6.4% for the S&P 500.

Also in my September column, I quantified the top newsletters’ opinion about the Dow Transports by assigning an index reading to each of that benchmark’s 20 stocks. A stock earned a rating of 100 if it was at the top of a ranking of the most widely-held stocks among the model portfolios of all monitored newsletters, and a rating of 0 if it was owned in none of those models. Otherwise a stock’s index reading was proportional, based on how many top performers were recommending it relative to how many were recommending the most-recommended stock.

The current average rating for the 20 Dow Transports stocks is just 13.8, slightly lower even than the comparable average in September. For the 30 Dow Industrials, in contrast, the average is 44.2. This does not bode well for the Dow Transports’ prospects.

Of course, the bull market is not immediately doomed by the continued failure of the Dow Transports to eclipse their old highs. After all, since the September 2018 date when the Dow Transports hit their high, the Dow Industrials have gained 7.6% and the S&P 500 11.8%.

Still, this disconnect cannot last forever. We ignore persistent weakness in the Dow Transports at our peril.