A Pivotal Point for the Transportation ETF and the Dow

NEW YORK ( ETF Expert) -- I've listened to scores of prognosticators interpret "Dow Theory" in a variety of different ways.

However, all of them may agree upon one disconcerting reality; specifically, the year-long relative weakness in the Dow Jones Transportation Index could be cause for some concern.

While I do not believe in the semi-simplistic notion that the transportation stocks must lead the way for industrial stocks, I do pay attention when the iShares DJ Transports ( IYT) lags the SPDR Dow Jones Industrials ETF ( DIA).

The best way to spot trends in that relationship is with the IYT:DIA price ratio.

At first glance, one notices that transportation stocks via IYT have not been weaker relative to the popular DIA since November 2009. Equally apparent, IYT had led DIA higher for the first 18 months. However, the series of "lower highs" for IYT:DIA over the next 18 months demonstrates ongoing weakness for railroad, trucking, air freight and shipping.

The shift may not be all that surprising when we consider the nature of transporters. Most are taking raw goods, unfinished products and natural resources to other corporations... a sign that GDP may expand. Over the last year and a half, however, global growth has waned; fiscal and monetary stimulus has only been modestly effective in reflating brand name stock assets, but less impressive at kicking global GDP into a higher gear.

The question remains, though, should a broader market investor care? If you tend to invest in the S&P 500 or Dow 30 via SPDR S&P 500 ( SPY) or the SPDR Dow Industrials, why should you fret weakness in transports, energy, materials and/or natural resources?

The previous two times that the IYT:DIA price ratio reached these depths (i.e., November 2009, October 2011), aggressive stock assets rallied significantly. Most of the global growth story "faves" -- materials, transports, small-cap stocks, emerging market assets - rocketed higher.

In my estimation, if IYT:DIA begins to strengthen from here, we will see new intra-year highs for the S&P 500 and Dow Industrials. On the other hand, if IYT:DIA served up additional weakness in transports, global recession fears would likely trump recent psychological feel-goods like 1400 on the S&P 500 and 13000 on the Dow.

A sign of greater relative strength in IYT would likely indicate additional broader market gains to come, whereas more relative weakness in IYT would likely precede broader market selloffs.

It follows that, in spite of tepid volatility and low volume, investors may be sitting atop a pivotal point for the direction of the Dow.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

ETF Expert is a website that makes the world of ETFs easier to understand. Gary Gordon, Pacific Park Financial and/or its clients may hold positions in ETFs, mutual funds and investment assets mentioned. The commentary does not constitute individualized investment advice. The opinions offered are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial or its subsidiaries for advertising at the ETF Expert website. ETF Expert content is created independently of any advertising relationships. You may review additional ETF Expert at the site.

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