Transports to Bears: Your Time Is Up
Contrary to what Dow Theory suggests, Transports are about to lead.
The best thing about the future is that it comes one day at a time.
-- Abraham Lincoln
With markets nearing all-time highs, one of the things I continuously hear in the media is that the Dow Jones Transportation Index (^DJT) is not confirming the bull move, thus making this entire rally suspect in the broader stock market. This idea relates to “Dow Theory,” which argues that the price action of companies that ship things must confirm the price action of companies that make things. It sounds like a plausible... theory. The problem is that it has not worked, and the time for such a move to play out may have fully passed.
Take a look below at the price ratio of the iShares Dow Jones Transportation Average (IYT) relative to the Dow Jones Industrial Average (DIA). As a reminder, a rising price ratio means the numerator/IYT is outperforming (up more/down less) the denominator/DIA.
Here's the problem with Dow Theory now. The ratio is hitting three-year lows, and a potential V in strength appears to be taking shape just as the media is hammering the idea that Transports are not confirming the rally. An uptrend ratio means Transports are outperforming the broader Dow, which then would completely invalidate the confirmation idea under the premise that market participants are re-evaluating future prospects of shippers.
But more so than that, remember that it's a theory. Broader market averages are near new all-time highs on the reflation theme I have stressed all year, and Transports have not confirmed the whole way through. Does the price action of Transports, then, as a standalone indicator, really mean all that much to begin with? And even if it did, with outperformance likely, then so what?
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