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Transports as a Leading Indicator

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Who cares about history, anyway?

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I've always been intrigued by the amount of attention Transportation stocks get as a harbinger of things to come for the rest of the economy and the stock market. The Dow Theory discipline is predicated upon both Transports and Industrials doing well in order to have a "healthy" market.

The trouble is, in all of my studies I can't confirm that that's true. If anything, the opposite seems to be the case. There are an innumerable number of ways to look at the data, but what I found to be most useful was looking at the rate of change for both indexes over the span of the past 90 days.

Since 1929, what we found is that when the Industrials had a 90-day rate of change of +10% or better, and the Transports did too, then six months in the future the Industrials were higher 70% of the time and sported an average return of +4.9%. Not bad.

However, when we looked at those times the Industrials had a rate of change of +10% or better (same as before), but the Transports actually had a negative rate of change at the same time, then the Industrials were higher six months hence 81% of the time, with an average return of +9.3%. So the gain in the Industrials was twice as good when Transports were lagging badly than when they were in gear with the Industrials.

Looked at another way, we can compare the rate of change between the Industrials and the Transports, and see what happens at the extremes. What we're looking for now is any time the rate of change between the Industrials and the Transports was greater than +20% (meaning the Transports had greatly outperformed the Industrials) or less than -20% (meaning the Industrials had greatly outperformed the Transports).

The conclusion? Looking 60 days into the future, when the Transports had outperformed the Industrials, then the Industrials were higher 37% of the time with an average return of -2.5%. Conversely, when the Industrials had outperformed the Transports, then the Industrials were higher 87% of the time with an average return of +10.4%. Huge difference there.

So the bottom line is that 76 years of history suggest that the Transports are traditionally not a good leading indicator for the Industrials. When they have outperformed the Industrials, it lead to poor future performance for the Industrials, and vice versa. So if the Industrials hold up here, and the Transports break down, I would not consider that to be even a minor negative.
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No positions in stocks mentioned.

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