Transport stocks may signal a problem with the market

Trading Nation: Transport stocks
Trading Nation: Transport stocks   

It's one of the oldest theories in the book: The Dow confirmation theory.

Based on tenets promulgated more than 100 years ago by Wall Street Journal founder Charles Dow, the idea is that a rally in the Dow Jones industrial average must be confirmed by a rally in the Dow Jones transportation average. The logic is that if transport stocks aren't doing well, that indicates a lack a health for the manufacturing companies themselves, which must be getting oodles of good shipped to and from them in boom times.

The theory is still used to this day, despite the fact that modern-day Dow Jones industrials like Goldman Sachs and American Express probably aren't especially dependent on current Dow transports like JetBlue and Alaska Air.

And one technical analyst, Jonathan Krinsky of MKM Partners, now notes that transport stocks haven't "confirmed" the rally in the Dow as a whole.

"Through the first quarter, the transports were actually the worst of the 24 industry groups. And going back to 1990, that's never happened," Krinsky said. "So this year, the Industrials made a new high in early March, but the transports didn't. So we have that Dow Theory nonconfirmation."

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However, he isn't forecasting blood in the Street.

"It really doesn't become troubling, or a sell signal, until both indices close below their prior correction lows. Transports are flirting with that level today, but industrials are still well above that level," Krinsky said Wednesday. "So right now, there's no sell signal."

David Seaburg, head of equity sales trading with Cowen & Co., sees the whole situation a bit differently.

"I look at it and say absolutely not, this isn't a precursor of worse to come," Seaburg said. "I think you can throw this whole 'Dow Theory' thing out the window."


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