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Another Stock Market Disconnect Has Surfaced

CAMS Weekly View from the Corner – Week ending 4/8/2022

April 11, 2022

Messages emanating from the stock and bond markets have been and continue to be plentiful. They have been radiating a message of caution and in some cases outright concern in recent months to even as far back as nearly a year.

Over the past week-plus we have seen a pummeling of a primary stock index known as the Dow Jones Transportation Average. The tremendous, out-of-nowhere downside price action has left much damage in its wake as well as a cautionary market message when viewing it in context of the overall stock market.

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The above is a twelve month chart of the Dow Jones Transportation Index.

Our red down arrow highlights the tremendous price drop for this Index in the previous week-plus. In the matter of several trading sessions the above went from challenging high levels of the previous year to putting in new lows for not only 2022 but also for the previous twelve months! That’s harsh.

In addition, our black circle highlights the tremendous amount of shares that had been traded in this downside process. This underlines that market participants were leaving the space not only in a hurry but also in size.

We also include a black arrow highlighting the previous strong upward price move dating back a couple of weeks ago.

This takes us to our primary topic in recent editions whereby we have been curiously asking if we are in a true bear market whereby the market will give what looks like “all clear” (or “clearing up”) signals only to then turn tail and print a lower low. The above price action for this Transportation Index over the previous few weeks depicts our curiosity and description to a tee.

A Notable Market Disconnect

With the Transportation Index falling out of bed we can think of this as a negative divergence. Simply, it is notably diverging from a stock market relationship it typically holds in “good times” if you will – hence it is negatively diverging from its expected relationship and through this calls into question the forward health of the stock market overall.

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The above depicts the broad S&P 500 Index (black line) along with the Dow Transportation Index (blue line) for 2022. The general cohesiveness of these two in terms of their trend characteristics is obvious. Also obvious is the aforementioned negative divergence in that the Transportation Index (blue line) has completely disconnected from the broad stock market via the rapid downside movement of the Transport’s in recent trading sessions.

This is notable and should not be ignored.

Historical Relationships

Historical market relationships are important as they are carved out over time for a reason.  They typically have withstood the test of time which is an important hurdle in proving their value as a relationship or measure for collective market participants.

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Above we again note the broad S&P 500 Index (black line) along with the Dow Transportation Index (blue line) only this time for the previous ten years. Again, these two together speak to their obvious trading cohesiveness. Then, at times, we see them diverge and when doing so for an extended period of time suggests market challenges may be coming.

Our red arrows highlight two notable time periods of the last decade with current day being one of them.

The behavior of the Transports in the last week-plus (as shared above) adds notable concern to this storyline. They were trying to clean up and perhaps actually trend which would have begun to negate the diverging behavior depicted directly above that has been in place for months now.

If the Transportation Index goes much lower from here it will be blinking a red light of concern for the overall stock market.  Caution remains warranted. I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis


H&UP’s is a quick summation of a rating system for SPX9 (abbreviation encompassing 9 Sectors of the S&P 500 with 107 sub-groups within those 9 sectors) that quickly references the percentage that is deemed healthy and higher (H&UP). This comes from the proprietary “V-NN” ranking system that is composed of 4 ratings which are “V-H-N-or NN”. A “V” or an “H” is a positive or constructive rank for said sector or sub-group within the sectors.

This commentary is presented only to provide perspectives on investment strategies and opportunities. The material contains opinions of the author, which are subject to markets change without notice. Statements concerning financial market trends are based on current market conditions which fluctuate. References to specific securities and issuers are for descriptive purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. There is no guarantee that any investment strategy will work under all market conditions. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. PERFORMANCE IS NOT GUARANTEED AND LOSSES CAN OCCUR WITH ANY INVESTMENT STRATEGY.

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