Transports Free Falling!

I watched yesterday’s Transports rally very carefully.

One of the technical reasons the markets have been suspect has been the divergence between Transports and the Industrials. As of 10:30 today, the Trannies are off by more that 2.36% — giving up all of yesterday’s merger driven gains — and then some.

What does this mean for the longer term? Well, if you are a Dow Theorist, you want to see Transports confirming strength in Industrials.

Why? Manufactured products have to get to their products to the buyers, and they must be shipped.

Classic Dow Theory states:

"A failure of the transports to post a new high by year-end would have bearish implications because it would set up a possible Dow Theory sell signal. Dow Theory signals have their origin in Charles Dow’s concepts, one of which is that the averages must confirm each other. Dow argued that no important bull or bear market could occur unless the industrial and the rail (transport) averages gave the same signal or confirmed a change in market trend.

Both averages had to move above a previous secondary peak to generate a bull market signal. This price confirmation by both averages should occur at about the same time within a six month window.

The last Dow Theory buy signal was posted in early 2003 when both the Dow industrials and the Dow transports broke above their previous trading peaks. We now need to examine the Dow Theory model and see if a sell signal is probable."

Why the concern? The Dow transportation average is about 400 points under the 5,014 peak posted on May 10, 2006. The Dow is at all time highs.

Beware Dow Theory sell signal
Toronto Star, Oct. 6, 2006. 10:00 AM

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What's been said:

Discussions found on the web:
  1. Sherman McCoy commented on Oct 17

    I think last week- when you were the last bear standing, Barry- will be remembered in the long-run as THE top.

    If today’s inflation data is followed by a couple more negative reports, we go downhill fast. If not, we go downhill slow.

    Time for investors to push that attractive red button. DEAL! DEAL! Take the winnings and go home…

  2. Geoff commented on Oct 17

    correct, and if you were smart, you’d have bought DXD before the close yesterday. ANd if you are really smart, you’d hold it for a good while.

  3. wcw commented on Oct 17

    DXD eats 95 bps a year. I don’t see that as useful for a long-term short position. Instead of a round lot of DXD, which will cost you $6200 or so to be “short” twice that amount of the DJIA, simply sell one YDXFO and buy one YDXRO. Your outlay is $630-$1130 = -$500 (since an effective short rebate is baked into this synthetic June ’08 future), and you’re effectively short exactly the same as you would be with 100 DXD, at least through June 19, 2008. Or just trade futures directly — that’s even more efficient, but even the minis are a little big unless you’re buying ten round lots of DXD.

  4. TC commented on Oct 17

    Till yesterday, the Dow Transport was about 5% off (intra-day high) from the approx 5000 level, which was its prior peak. The DJIA meanwhile is approx 3% above its prior peak of 11670. This divergence is narrowing since the Transports were off their prior high by 8%, in the week ending Oct 6. We still appear to have sufficient time for the Dow Transports to confirm the DJIA rally. In the meantime, the market has been strong with the NASDAQ and small-cap rally accelerating over the past 2 weeks, when compared to DJIA and S&P 500, which have already chalked up new highs. It may still not be time to hit the Red Sale button, assuming that we hit the Green Buy button before. The forceful rally has taken at least me by surprise. And the bias is more Up then Down. It will take more than even a less salubrious CPI report to derail this rally. Till the time that energy prices remain muted it will be hard to shift from the reasoning that the ‘benefit from the drop in energy prices still has to work its way through the pipeline.’ The earnings season will now determine if this rally has the punch to push ALL major indexes to 52-wk highs.

  5. GS commented on Oct 17

    Is the glass half full or half empty from a technical analysis perspective?

    Barry thinks the glass is half empty for logical and sound fundamental reasons and as a consequence missed an good rally off the double bottom lows in the DJIA, SPX, Russell 2000 in July and belatedly in the DJTA the week of Sept. 11. It happens to the best of us.

    What is the glass half full technical analysis argument?

    The Dow Industrials have finally confirmed the Transports new sustained all time high from last year. Now that both indexes have made new all time highs there is no lingering long term divergence. Granted each index reached their respective milestones over a year apart, but the fact of the matter is both have reached new all time highs above their previous highs. (May 1999 DJTA high and the Jan 2000 DJIA high)

    New all time highs have been made in the following US indexes in the last 12 months:

    Dow Transports
    Dow Industrials
    NYSE Composite
    SP small cap
    SP mid cap
    Russell 2000
    Value Line Arithmetic

    The ONLY major US indexes that have not reached new all time highs are the SPX, Nasdaq Comp and Nasdaq 100. I put the odds of the SPX hitting a new all time high at 50% at this time. This week is key in my opinion. By the way, I am a short to intermediate term trader and went long off the double bottom lows this summer (see previous post last July at the low) and reversed to short this morning for what is probably a correction in the uptrend, but I don’t know. It could be THE high, we will all know in the course of time. Major cycles top mid November and then in January – March 2007.

    By the way, since the market did not go down like Barry thought it would this year (2006) the probabilities are very high that 2007 will see the BIG one that Barry has been looking for. In other words, 2007 is setting up as the year for THE highly profitable fast move down (semi crash) that this bull market needs to cleanse the excesses.

    The bottom line for me is I trade what I see on the charts and not what I think is going to happen based on fundamentals. It seems to work better for me that way. I do not miss many moves.

    Thank you Barry for all your contributions and I do wish you all the best with running money.

  6. Bruce on the loose commented on Oct 17

    I found this interesting. Premise is that the Dow is in a short covering rally since July ’06. PPT to make index look good before Nov. elections. If Dems win big (likely), then the street won’t be happy. IMHO the fundamentals are weak, but (political) seasonality trumps. Don’t fight the tape/intervention. Future plans: tactical investing. Still believe we’re headed lower soon, but tactical generates returns up or down, while protecting principal on the down side. My 20 cents (inflation adjusted).

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