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Why the Lagging Transports Are Worrying


Is a correction right around the corner?

The trannies are talking and what they're saying has some pros spooked.

Technicians and strategists note that the Dow Transports are struggling. Smita Sadana, founder and CEO of Sunrise Capital, noted on the Buzz this morning that, at 9880, the Dow Industrials are only 2% off of their highs while, at 3680, Dow transports have shed about 9%.

The ETF that tracks the Transports, the iShares Dow Jones Transportation Average Index Fund (IYT) -- which includes holdings like Burlington Northern Santa Fe (BNI), CH Robinson Worldwide (CHRW), FedEx (FDX), JB Hunt Transport Services (JBHT), Union Pacific (UNP), and United Parcel Service (UPS) -- has slipped 3.7% in the past five days.

For those who forecast where the market is headed by eye-balling stock charts, this is cause for concern: Dow Theory, formulated by Charles Dow, requires that moves by the industrial average be confirmed by the transportation average if it's going to be maintained.

"The new highs in one have to be confirmed by the other in short order," Sadana told us in a brief chat this morning.

She adds, "Now we see that the Dow made a new high, but Transports did not. Also, Transports are now independently making a double top formation, which is a bearish pattern."

Click to enlarge

Looking ahead, Sadana says the recent lows in Transports ought to hold because, if not, and they break down below the 3640 area, about 50 points from here, we face the very real risk of the market going back to its June high, when the Transports were at 3400.

"This is a leading indicator," she tells us. "If the Transports break the recent low then they could go much lower. And, obviously, if they go lower, the market is more vulnerable to a decline of consequence."
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