The Dow Jones Transports (transports) have been one of the weakest segments of the market since July. As Charles Dow suggested more than 100 years ago, for the primary trend to be in place we need to see the transports confirm the action in the Dow Jones Industrial Average (Dow). In other words, if the Dow makes a new high and the transports group doesn’t, that is a potential warning sign.
Well, on August 1, 2017 the Dow closed at a new 52-week high, yet the transports group closed at a new 52-week low relative to the Dow. In others words, the performance gap, or spread, between the two is at its widest over the past year. So it would seem transports aren’t carrying their weight; and the question is: Is this a major warning sign?
Per Ryan Detrick, Senior Market Strategist, “Going back in history, we have often seen the rare combo of a 52-week high in the Dow and a 52-week relative low in transports precede some tumultuous times. It took place ahead of the ‘73/’74 bear market, the ’87 crash, and the ’00 peak for starters, which makes the signal seen earlier this month something we aren’t taking lightly.”
Now here’s the good news: The track record of this rare signal is far from spotless. Per Ryan Detrick, “Although on the surface this sounds scary, looking at all the signals (to remove clusters, each instance must be at least three months apart to define a new signal) in which the Dow and Dow/transports spread hit new 52-week highs, the Dow has been up a median 17.1% over the following year. We’d still say the weakness in transports is a concern, but a bigger concern is that we’ve gone more than a year without a 5% correction, and there are multiple big events (think debt ceiling, tax reform, and infrastructure spending) out of Washington on the horizon that could trip up the market.”
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