The Dow Jones Transportation Average has dropped nearly 10% in the last five trading sessions including today. Historically, this index is watched as a harbinger of what's to come in the broader stock market, so when investors see a move like this, many interpret it as a signal of a broader sell off to come. But there's two sides of this argument.
Starting with the bear case, Bloomberg Macro Strategist Cameron Crise crunched the numbers in his column today, comparing the relative performance of the S&P 500 and the Transports Index. Last week's decline was its 7th-worst day against the broader market since 1928, according to Crise. When looking at other occurrences, he noticed this kind of move is only seen after some of the most traumatic episodes in U.S. market and economic history.
But there's another side to this. One of Bloomberg TV's markets producers Dan Curtis examined a different set of data. Since 2010, the index has fallen 5% or more in a week 124 times. 85 of those times, the S&P 500 was higher a month later. In other words, about 2 out of 3 times, the S&P 500 rallied one month after a significant drop in the Transports Index. That debunks the Dow Theory.
Given the Dow Transports mostly hold railroads, airlines and shipping companies, it serves as a proxy for economic activity in the United States.
