- February 2nd, 2011
One of the tenets of Dow Theory is that stock market indices need to confirm each other. That typically means that the industrial and transportation stocks need to be acting in accordance with each other. Of late the transportation stocks have been diverging from the industrials. This could be a function of higher oil (and fuel) prices or could be a signal of something else altogether.
A handful of market observers recently noted this growing divergence.
Dynamic Hedge – “The Dow Transports are not following the latest new high in the S&P. In fact, there is some serious divergence in the chart.”
Michael Kahn at Barron’s – “But when it comes to transportation stocks, there are too many cracks in the sector to ignore. Stocks that both move goods and people are showing rather bearish chart.”
chessNwine – “While the S&P 500 is right at 52 week highs, the transportation stocks (IYT or DJT) are slicing down through their respective 50 day moving average.”
A quick glance at the chart of the iShares Dow Jones Transportation ETF (IYT) shows that while the broad market has powered to new highs the transports have lagged. The chart:
Divergences of this kind can resolve in a couple of ways. The bear case is that the transports are a market bellwether leading the market lower. The bull case is that the transports are throwing off a false signal, likely driven by oil prices. This would require a rebound in the transports, or at least no further divergence. In either event it is worth keeping an eye on this relationship.
Abnormal Returns is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com. If you click on my Amazon.com links and buy anything, even something other than the product advertised, I earn a small commission, yet you don't pay any extra. Thank you for your support.
The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.
Abnormal Returns has over its seven-year life become a fixture in the financial blogosphere. Over thousands of posts we have striven to bring the best of the financial blogosphere to readers. In that time the idea of a “forecast-free investment blog” remains as useful as it did six years ago. More »
- Wednesday links: the multiplier effect
- Tuesday links: knowledge alone
- To bond ETF or not: an excerpt from Rational Expectations by William Bernstein
- Monday links: excessive valuations
- Sunday links: paralyzed with fear
- Top clicks this week on Abnormal Returns
- Saturday links: ripe for disruption
- Friday links: investor class attentions
- Thursday links: doing something different
- Wednesday links: tenacious independence