The Dow’s Sidekick Points to Upside Potential
CAMS Weekly View from the Corner – Week ending 5/18/2018
May 21, 2018
Dow Theory made very simple: Transport Materials – Create Products – Transport Finished Products. Excerpt Weekly View – Blue Line/Red Line Divergence May 22, 2017
The well recognized Dow Jones Industrial Average has an important sidekick known as the Dow Jones Transportation Average. While the Transportation Average is less well known it is an important Index to monitor nonetheless. Monitoring the two together is customary.
Our header quote speaks to these two together in an economic relationship. This economic relationship is what ultimately makes these two Averages so important among market participants. When they are generally in sync to the upside it offers an expectation of continued or improving economic growth.
When they diverge from one another it offers caution. This is especially true when the Transportation Average weakens in advance of the Industrials.
Our chart below speaks to this caution via the red circle at the top of the chart. In the time highlighted the Transports had begun to top out and started heading lower while the Industrials were still on an uptrend. Shortly thereafter the Industrials joined in to the downside as well.
Continuing with the Transportation Average depicted in the chart above we see they have moved sideways with the overall market since late winter. Here in recent trading sessions the Transportation Average has been outperforming the Industrial Average to a small extent.
Outperformance to the upside by the Transportation Average bodes well for the overall health of the stock market. Importantly, at this stage the outperformance has been marginal relative to the Industrial Average so we are watching to see if this can build momentum.
At this juncture the horizontal black line in the chart acts as a solid ceiling in recent months whereby this Index has been unable to penetrate through to the upside. Currently it is displaying some staying power whereby in previous attempts it would approach these levels and immediately lose its strength.
With this propensity to hang up there at these levels it is implying more strength than previously displayed. If the black line can be penetrated to the upside this will pave the way for the overall stock market to improve further.
All told, per our recent Weekly Views, the stock market has been able to stay off concerning developing downtrend patterns. The Transportation Average moving north of the black line will go a long way in pointing to the stock market’s improving behavior.
I wish you well…
Director, Market Research & Portfolio Analysis
Portfolio Manager, CAMS Spectrum Portfolio
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.
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