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) and came despite lower crude oil prices and strong earnings from Union Pacific ( UNP), 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."

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

Airline stocks were weak Thursday even as crude fell $1.14 to $54.23; the Amex Airline Index fell 1.9%, led lower by Mesa Air Group ( MESA), which posted weaker-than-expected results.

A more fundamentals-based bearish view is that the Dow Transports are faltering because persistently higher oil prices -- even if down from summer highs -- are dragging down economic activity and, thus, reducing demand for transportation services. December profit warnings from YRC Worldwide ( YRCW) and FedEx ( FDX) bolstered such views. Then on Wednesday, Norfolk Southern ( NSX) posted weaker-than-expected results and its CEO said "we're clearly facing a softer economy."

But UPS ( UPS) (which reports next week) appears to be benefiting from FedEx's struggles, and Norfolk Southern is the anomaly in an otherwise strong railroad sector, Jim Cramer said in our Wall St. Confidential video on Wednesday. He repeated that view Thursday in the wake of Union Pacific's strong results and also expanded upon his theory that rails are benefiting at the expense of trucking firms, which are being hurt by a lack of qualified drivers and America's poor highway infrastructure.

Furthermore, the overwhelming tone of recent macroeconomic data lately, including December retail sales and non-farm payrolls, shows the economy was building steam at the end of 2006 and into early 2007. Even Thursday's "weak" December existing home sales report included a 302,000 drop in inventory of unsold homes and resultant improvement in the key inventory-to-sales ratio.

The irony of making a bearish case about Thursday's stock market weakness is that it was largely due to rising Treasury yields, which are responding to the aforementioned economic data and a realization the Federal Reserve is highly unlikely to cut rates anytime soon. Indeed, "the bond selloff shifted from the 'no recession' variety, which was deemed favorable to the stock market, to the unfriendly variety related to renewed fears over the Fed" and possible rate hikes in 2007, writes Tony Crescenzi, chief Treasury strategist at Miller Tabak and a RealMoney.com contributor. "This is at the heart of the equity market's weakness today."

In sum, the Transports are a microcosm for the broader market, providing fodder for both sides of the bull vs. bear debate, but the onus remains on the latter to prove the "divergences" are real.
Aaron L. Task is editor at large of TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He appreciates your feedback; click here to send him an email.

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