Dow Theory gives warning signal…again

Published Fri, May 15 20157:09 AM EDTUpdated Fri, May 15 201510:06 AM EDT

The underperformance of the Dow Transportation Average this year may be the reason why the overall market remains range-bound and why it may pull back, some market watchers believe. As CNBC Pro highlighted earlier this year, Transports have been sending a warning signal for stocks , which have been trapped below the same level since February. So far in 2015, the Dow Transportation Average is down 6 percent compared with an increase of 2 percent for the Dow Industrial s, a rise of 3 percent for the S & P 500 and a gain of 6 percent for the Nasdaq Composite . That divergence, to some investors, may be canary in a coal mine for a potential significant decline ahead. "Something isn't right with the Dow Jones Transportation Average," says Carter Worth, head of technical analysis at Cornerstone Macro. Source: FactSet "Transports are at the throes of a 'bullish-to-bearish reversal'…toying with the prospects of breaking the well-defined trend line it has been ascending in the past three years," adds Worth, who thinks the index could drop another 8 percent from here. Read More Top investor: Summer correction coming. Buy this The century-old "Dow Theory" states that when both the Dow Industrials and transports move in tandem and trade around new highs, it signals strength and confirms a bullish pattern. When the transports index doesn't confirm, it means the economy isn't quite strong enough and one should take profits on the overall market. This isn't just charts. There are very real reasons why the transportation average is failing. Shares of Kansas City Southern , for example, hit a 52-week low Thursday, after the company withdrew its 2015 revenue and volume guidance. In the past three months, ticker KSU is down 20 percent. Similarly, other railroad names like Union Pacific and Norfolk Southern are down over 12 percent over the same period. Investors CNBC Pro spoke to are not ready to run out and sell everything yet. But if this barometer of the economy doesn't confirm the market's new highs soon, it may be time to take profits, they said. Based on Carter Worth's chart analysis, some of the names on his "sell" list include the stocks mentioned above along with C.H. Robinson Worldwide , Landstar System , and Spirit Airlines .

Traders work on the floor of the New York Stock Exchange.

Brendan McDermid | Reuters

The underperformance of the Dow Transportation Average this year may be the reason why the overall market remains range-bound and why it may pull back, some market watchers believe.

As CNBC Pro highlighted earlier this year, Transports have been sending a warning signal for stocks, which have been trapped below the same level since February.

So far in 2015, the Dow Transportation Average is down 6 percent compared with an increase of 2 percent for the Dow Industrials, a rise of 3 percent for the and a gain of 6 percent for the Nasdaq Composite.

That divergence, to some investors, may be canary in a coal mine for a potential significant decline ahead.

"Something isn't right with the Dow Jones Transportation Average," says Carter Worth, head of technical analysis at Cornerstone Macro.