- 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.
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