A factor that needs to be considered when looking at the Dow Jones Industrial Average is the Dow Jones Transportation Average. When someone says "how'd the market do today?" most people are referring to the Dow Jones Industrial Average. However, the Transportation Average is also a key element to determining the health of the stock market and the economy. In fact, the Industrial and Transportation Averages are a critical components of Dow’s Theory.
Right now the Transportation Average is at the level of 3416.16 while the more widely known Industrial Average is at the level of 8253.58. Although these indices are far from former highs there is an alarming characteristic about both market barometers that must be pointed out.
According to Dow’s Theory, a new major market upturn is signaled when both the Industrials and the Transports have bottomed and are both moving higher. As long as both indices go above the high of a previous peak in the market then the “bull” market is in place.
In the chart below, from the period of Oct. 1995 to Oct. 2004, you will see that the Industrials (blue line) reached a new low (green circles) on September 30, 2002. The Transportation Average (red line) reached a new low on March 3, 2003. Even though the Industrials were already moving higher in late 2002 it didn’t mean a new “bull” market was in place. Only when both the Industrials and the Transportation Average have hit [a] bottom and move higher together does it confirm a possible reversal of the trend.
Right now the Transportation Average is at the level of 3416.16 while the more widely known Industrial Average is at the level of 8253.58. Although these indices are far from former highs there is an alarming characteristic about both market barometers that must be pointed out.
According to Dow’s Theory, a new major market upturn is signaled when both the Industrials and the Transports have bottomed and are both moving higher. As long as both indices go above the high of a previous peak in the market then the “bull” market is in place.
In the chart below, from the period of Oct. 1995 to Oct. 2004, you will see that the Industrials (blue line) reached a new low (green circles) on September 30, 2002. The Transportation Average (red line) reached a new low on March 3, 2003. Even though the Industrials were already moving higher in late 2002 it didn’t mean a new “bull” market was in place. Only when both the Industrials and the Transportation Average have hit [a] bottom and move higher together does it confirm a possible reversal of the trend.
As I mentioned before, both indices hitting a bottom is only the first indication of a possible bull (rising) market. The next step is that the indices needs to go above the previous market peaks (purple dashed lines) in the order of lowest peak to highest peak. Initially, the Industrials didn’t go over the 2nd market peak but ultimately did. On the other hand, the Transports went above the previous peaks without any problem.
The dilemma that we’re faced with in this market is the opposite of what happens during a bull market. In a bull market the indices will have to go back to the last and highest prior peak to confirm the strength of the move upwards. In a bear (falling) market, prices will (or need to) fall to prior lows in order to confirm the trend.
In the chart below you see the current state of the market and how much the market rose from the bottom in 2002/2003 (green circles.) On the chart below the Industrials (blue line) are currently near the low of 7528.39 back in 2002. Also notice that the Transports (red line) are very far from the low level of 2042.48.
The dilemma that we’re faced with in this market is the opposite of what happens during a bull market. In a bull market the indices will have to go back to the last and highest prior peak to confirm the strength of the move upwards. In a bear (falling) market, prices will (or need to) fall to prior lows in order to confirm the trend.
In the chart below you see the current state of the market and how much the market rose from the bottom in 2002/2003 (green circles.) On the chart below the Industrials (blue line) are currently near the low of 7528.39 back in 2002. Also notice that the Transports (red line) are very far from the low level of 2042.48.
My concern with this picture is that in order for the Transportation Average to fall back to the prior low it would have to decline a total of 41% from the current level of 3462.67. This is a tremendous amount for any index to lose in a market where losses have been to the tune of 30% or more. Even more alarming is the fact that the Dow Industrials have fallen a total 10 points for every 3.5 points for the Dow Transports.
If in fact the Dow Industrials were to fall to the equivalent of the decline of the Dow Transports then the Industrials would have to fall and additional 5344 points based on the 10:3.5 ratio. This is a phenomenal amount to consider given that we’ve seen so much destruction of wealth so far. Touc.
