One of the elements of Dow Theory is that the Dow Jones 20 Transportation Average (DJTA) should confirm new highs in the Dow Jones 30 Industrial Average (DJIA). When this fails to happen, it is a bad sign for the market. The logic behind this is that, if industrial company stocks are doing well, the companies will be ordering raw materials in anticipation for future sales, which will be transported by the transportation companies, in turn causing the transportation stocks to benefit.
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(This is an excerpt from recent blogs for Decision Point subscribers.)
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The two charts below show that the DJTA has not confirmed the new highs in the DJIA all this year. Whereas the DJIA has continued to push to new highs, the DJTA has stalled and moved sideways.
The internals behind this divergence are even worse than revealed by price. Each chart has a panel showing the percentage of stocks in each price index that are above their 200-EMA. Note that the percentage for the DJIA is near 90%, while it is only 20% for the DJTA.
When a stock's price is below its 200-EMA, by our technical definition it is in a long-term bear market. With 80% of DJTA stocks in bear markets, the outlook for the DJTA is not good. And in accordance with Dow Theory, the prospects for the broader market are much worse than the new highs in the DJIA would imply.
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Technical analysis is a windsock, not a crystal ball.
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