Dow Transports drops 10% in five trading sessions

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.

Dow transports are out of position to satisfy Dow Theory

Though the Dow Jones Industrial Average is poised to set a record, as the S&P 500 Index did last week, Dow Theory followers may be disappointed for some time. The theory holds that the Dow Jones Transportation Average must also reach a new peak to confirm stocks are going higher, and it’s nowhere close. At Monday’s close, the transports were 12% below their September record and the industrials were just 0.4% away from their highest-ever level, reached in October. The performance gap sent the transports to the lowest level relative to the industrials since October 2012, as shown in the chart.

 

Dow Transports send warning signal for S&P 500

Airlines, railroads and other transportation companies are sending “a warning signal about another change in trend” for U.S. stocks, Matt Maley, an equity strategist at Miller Tabak & Co. LLC, wrote Thursday in an e-mailed note to clients.

The Dow Jones Transportation Average dropped 4 percent through Wednesday from this year’s high, set March 18, and extended its decline in early trading on Thursday. The 20-stock average rallied from its 2016 low about three weeks before the Standard & Poor’s 500 Index followed suit.

Dow Transports trying to reclaim broken post-2009 UP trendline

Here’s what the Dow Transports is up against to keep its bull market alive

Dow Transports seen lacking as market barometer

(Bloomberg) -- Airlines, railroads, shippers and other transportation companies are “a pretty poor lead indicator” of U.S. stocks if history is any guide, according to Jeremy Hale, Citigroup Inc.’s head of macro strategy.

As the chart shows, the Dow Jones Transportation Average dropped as much as 9.96 percent since Dec. 29, when the 20-stock indicator set a record. A 10 percent loss is commonly defined as a correction.

The slump led Hale and four colleagues to look at the relationship between 10 percent retreats in the Dow transports and subsequent moves in the Standard & Poor’s 500 Index, which also appears in the chart. They presented the data in a report on June 4.

Since 1942, the S&P 500 rose on average in the one, three, six and 12 months after dates when the transportation average’s losses reached the correction threshold, according to the data. The gains amounted to 2.1 percent, 4.7 percent, 12.1 percent and 21.3 percent, respectively.

“The evidence is more mixed” about whether 10 percent losses in the transports foreshadow the peak of bull markets, Hale and his colleagues wrote.

In 1946, 1968, 1981, 1994 and 2008, the S&P 500 started falling before the Dow average did, according to charts cited in the report. On the other hand, the transports served as an early warning in 1956, 1973, 1989 and 2000.