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The Dow Jones Transportation Average hit the latest in a string of all-time highs Monday, but the Dow Jones Industrial Average has yet to challenge its pre-pandemic peak, underlining a warning sign for followers of what’s known as Dow Theory, according to one analyst.
“The classic technical framework interprets this signal as a warning sign for markets, when occurring at the highs,” said Julian Emanuel, chief equity and derivatives strategist at BTIG, in a Sunday note (see chart below).
BTIG
Dow Theory, formulated more than a century ago, is often referred to as the granddaddy of technical analysis. MarketWatch columnist Mark Hulbert has described it as the oldest stock-market timing system in widespread use today.
While the theory covers a lot of ground, investors often focus on the relationship between the industrials average and the transports average. When one average breaks out to a new high and is followed by the other, that is viewed as confirmation of an uptrend. When one average breaks higher but the other fails to follow, that “nonconfirmation” is viewed as a “warning sign” but not a “sell signal,” as explained in this 2011 StockCharts blog post.
The Dow transports DJT, -1.14%, which tracks 20 transportation stocks, including airlines, trucking companies, marine shipping, delivery services and logistics companies, hit an intraday high of 12,000.19 early Monday, the first time it’s ever topped 12,000, was off 0.7% near 11,750 in midday trade. The Dow industrials DJIA, -1.53% gave up early gains to fall more than 300 points, or 1.1% to around 28,275.
After the pandemic-inspired plunge in late February and March, the transports gauge returned to record territory on Oct. 7, posting its first record close since Sept. 14, 2018, according to Dow Jones Market Data. It’s up more than 9% so far this year. The Dow industrials on Friday closed more than 3% below their record close of 29,551.42 hit on Feb. 12, and remain marginally lower for the year to date.
The industrials have also so far failed to challenge their recent closing high of 29,100.50 set on Sept. 2 ahead of last month’s equity pullback. That divergence is observed alongside
“While the world has certainly changed in the century-plus since Charles Dow postulated his theory — the DJIA extends beyond manufacturing and DJTA beyond freight — the Industrials’ inability to follow Transports above both the 9/2 and 1Q2020 highs, in conjunction with other divergences, points to the likelihood of continued volatility ahead of the November election,” Emanuel wrote. “The September low at 26,537 is the key level for the DJIA.”
The S&P 500 SPX, -1.68%, meanwhile, was off 1.4% near 3,437 after ending Friday around 2.7% below its record close of 3,580.84 set on Sept. 2.
