The divergence that’s worrying the stock market’s bulls
Dow Transports is falling while DJIA is rising

by Mark Hulbert

The bullish case has lost what until just recently was one of its strongest supports.

I’m referring to remarkable weakness in the Dow Jones Transportation Average (IYT) This lesser-known Dow average is a leading market indicator, and until earlier this year it had been much stronger than the more widely-followed Dow Jones Industrial Average (DIA).

Sure enough, the broad market rose smartly. Since my column six weeks ago noting the Dow Transports’ relative strength, the Dow industrials have tacked on more than 1,000 points.

Beginning in mid-March, however, the Transports have been the weaker of the two Dow averages. As you can see from this chart, the Dow industrials since then have gained around 1%, in contrast to a 4% loss for the Dow Transports.

It makes theoretical sense that the transportation sector would be a leading indicator, of course. If the economy is about to grow more slowly, or turn down, we’d expect freight companies to be among the first to exhibit weakness as advance orders begin to dry up.

This theory also has strong empirical support as well. One of the more rigorous studies was one conducted several years ago by the Bureau of Transportation Statistics in the U.S. Department of Transportation. It was based on the “Freight Transportation Services Index,” which the Bureau created to measure the movement of freight in the U.S. The study’s authors found that this index over the past three decades “led slowdowns in the economy by an average of four to five months.”

As is often the case with government statistics, the Freight Transportation Services Index is reported with a significant time lag. The most recent reading reflected activity in January, for example. But that month’s index was 1.3% below its all-time high came that was hit in November 2014.

Bulls will be watching closely on Wednesday when the Transportation Department releases the value of the Freight Transportation Services Index for February.

Meanwhile, however, the Dow Jones Transportation Average has spoken, and its message is bearish. It’s forecasting broader market weakness in coming weeks.

Courtesy of marketwatch.com