The Dow Theory is hanging on to its buy signal -- but only barely.

I am referring to the oldest stock market timing system that remains in widespread use today. When I last devoted a column to this theory, in mid-August, I reported that, at least in the opinion of some of the Dow Theorists I monitor, the Dow Theory's buy signal was already on life support.

Its status is even more dire today.

The culprit is the Dow Jones Transportation Average, which these Dow Theorists believe must rise to a new all-time high in order to keep the Dow Theory buy signal alive.

Earlier this month that new high looked to be within reach, but it was not to be. The Transports turned down, in a big way, when FedEx reported disappointing earnings.

Their failure represents the third time that the Dow Transports have valiantly attempted to surpass their September 2018 all-time high -- and the third time they've failed.

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Their relative weakness was on display on Monday of this week, furthermore. While the DJIA rose 0.1%, the Dow Transports fell 0.7%.

Unfortunately for the bulls, the top-performing newsletters are not particularly fond of the 20 stocks in the Dow Transportation Average. Their lukewarm opinions do not inspire confidence that the Dow Transports will be reaching a new high any time soon.

Consider how few of those 20 stocks appear in any of those top performers' model portfolios -- just seven, in fact. That's remarkable, because there are 700 individual securities that appear at least once in these top performers' portfolios. So the default expectation is that most, if not all, of the widely-followed stocks in the Dow Transportation Average would be held in at least one of these portfolios. For context, consider that of the 30 stocks in the Dow Industrials, 28 are held in at least one of the top performers' portfolios.

To quantify the top performers' lackluster opinion of the Dow Transports, I assigned an index reading to each of the 20 stocks in that average, as follows:

  • A stock earned an index reading of 100 if it was at the top of a ranking based on how many top performers were holding it in their model portfolio
  • A stock earned an index reading of 0 if it was held by no top performers
  • Otherwise, a stock's index reading was proportional, based on how many top performers were holding it in their model portfolios relative to how many were holding the most-recommended stock. For example, if half as many newsletters were holding a stock as were holding the most-held one, then its index value would be 50.

Calculated in this way, the index reading of the 20 Dow Transports stocks was a remarkably low 14. The comparable average for the DJIA was 47, or more than 3 times as high.

To be sure, this doesn't guarantee that the Dow Transports won't soon make it into new-high territory, or that the bull market isn't alive and well. But it's definitely not an encouraging sign that the top-performing newsletters are so lukewarm on the Dow Transportation stocks.