On the Implications of Dow Transport Leadership
Courtesy of Joshua M. Brown, The Reformed Broker
Stock traders are acting a lot like Eddie Murphy this summer – completely delirious and picking up trannies every chance they get.
The outperformance of the Dow Jones Transportation Average has been absolutely massive since the spring and some market watchers are taking this as the ultimate bullish sign.
Here’s a quick look at the $IYT (Dow Transports Index ETF) versus the S&P 500 since March:
Bill Luby at the Vix and More blog has this to say about the trannies as leadership group:
Since the March 2009 bottom, high relative strength readings in the transports have tended to precede significant bull moves in the broader markets…In my experience, the transports are generally an excellent proxy for the health of broader economy. Given the way the markets have recently reacted to earnings from FedEx ($FDX) and have done so similarly for $UPS, Union Pacific ($UNP), Ryder ($R) and others in the past, it appears as if I have a fair amount of company.
Luby is echoing what Charles Dow originally believed when creating his index of transportation names, even though back in the day they were mostly railroads. The production of goods (as represented by the Dow Industrials) must be at least matched by the actual moving and shipping of goods (as represented by the Dow Transports) for what we call "confirmation".
Having the trannies actually take the lead, however, is a new idea to me and something that I hadn’t considered was occurring. Here is ChessNWine’s look at the sector current setup which he considers to be both bullish and studly:
I’ve blogged a bit about the importance of following the trannies before, and now their leadership role for the overall markets gives us even more reason to do so.
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