The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.By David Gillie NEW YORK ( ETF Digest) -- The Dow Theory holds that sectors confirm one another as the true sign of economic growth. Primarily, if manufacturing is growing, shipping of raw materials such as coal, steel, etc. will show an increase in transports--especially railroads. Additionally, moving the manufactured goods to the consumer will show an increase in freight mostly by trucking. Tangentially, airlines should also see growth in air freight, as well as business and leisure travel.
The logic of the theory developed at the turn of the 20th Century is correct. However, over 100 years later, it may not be the reflection originally intended. To understand this, we need to look closely at the transportation index.
iShares Dow Jones Transportation Index Fund (IYT) tracks the Dow Transportation Index.
Union Pacific (UNP) has had a stellar performance, whereas Norfolk Southern (NSC) has significantly underperformed the index. How could two railroads have such a radical difference? The answer is simple: Union Pacific serves the Port of Los Angeles where all of our goods are being shipped to from China and other Asian manufactures. Norfolk Southern serves the "Rust Belt" where steel is made and coal is mined. "Steam coal" for power generation has been especially hard hit by the extreme low prices in Natural Gas. "Coking coal" is used in the manufacturing of steel and without heavy industry and infrastructure construction; coking coal has been in little demand.
Next, let's look at trucking. Trucking is all about one thing, getting consumer goods to retailers. C.H. Robinson (CHRW), a third-party logistics company, provides transportation services primarily in the trucking industry. CHRW is one of the best measures of the trucking industry. It is the worst performer of the top 10 holdings of this index. The poor performance is confirmed by J.B. Hunt (JBHT) being the 2nd poorest performer. This speaks very poorly to the brick and mortar consumer retail business.
It is no accident that two of the top holdings in this index are FedEx (FDX) and United Parcel Service (UPS). FedEx and UPS have attained the top performance slots (and weighting in the index) by bypassing the retail outlets to get goods to consumers. This is clearly evident by, what started as on-line booksellers, has crushed retailers like Barnes & Nobel. The next area of explosive growth was computers and electronics. Dell's direct-to-the-consumer marketing of computers brought significantly lower prices and grew exponentially. Another factor of simple logistics is people purchasing big screen TVs on line because they don't have a vehicle adequate to haul a huge package like a 55" TV.
Even with the cream-of-the-crop transports in the top three holdings comprising almost 30% of this index, IYF has had a sharp decline over the past month.
From the October lows, IYT has generally kept pace with the Dow Jones Industrial Average. As the Dow has drifted higher, IYT has created a disconcerting negative divergence. From a technical standpoint, IYT has developed an ascending wedge, considered to be a bearish pattern. Breaking the lower trend line with high volume selling confirmed a breakdown in the transports.
Currently, the 50 day moving average appears to be holding as support. The Money Flow Index and Stochastics look to have bottomed and turned. However, this is not confirmed by the slower Relative Strength Index and MACD. The +/- Directional Index shows the bears are clearly in control. Should the 50 day moving average support fail, the 200 day moving average doesn't show much of a support level and we could see price dropping to the longer term price support at $85.00.
A buy at $85.00 on IYT could be profitable if we see real economic recovery. But more than a buy/sell recommendation, IYT can give us some insight into the general health of the economy and the overall market, especially the Dow Jones Industrial Average. Watch IYT for the truth of economic recovery.
Disclosure: At the time I writing, I have no position in IYT.