The transports could soon drive the market sharply lower, warns one top technician.
On CNBC's "Futures Now " on Tuesday, Wall Street legend Louise Yamada said that the divergence that is happening between the Dow Jones transportation average and the Dow Jones industrial average could mean a steep correction in the very near future.
"It's the concept of 'Dow Theory' in which the companies that make the products and the companies that transport them are supposed to move in tandem," said Yamada, founder of Yamada Technical Advisors. "Most of the time they do, but the transports have broken support and now we are seeing a kickback into that resistance." The transports are down 8 percent this year while the industrials are up 1 percent in the same period.
Technical analysts often look at this 'Dow Theory' as a preview of what's to come in the broader market, and according to Yamada, "unless the divergence is eliminated, the risk of decline is pretty consistent." She pointed to two previous instances in which this divergence has proved to be bearish, in 1999-2000 and again in 2007. "Both of those instances took much longer than the six months we've seen thus far," she said. "But at the moment it's certainly an alert to us to remain cautious."
Of course, there are those who believe the 'Dow Theory' may be outdated.
Yamada added that the technicals on the market suggest that it could be "thinning" under the surface, as only a select number of stocks are making new highs. "Of the Dow stocks there are about seven or eight that are in distribution phases, and if you think of the Dow as a wall of 30 bricks, as you have more and more bricks dropping out, eventually the integrity of the wall is challenged," said Yamada.
Of whether we will see the pullback this summer, Yamada said, "it's quite possible that we will get something in the range of a correction which is defined at 10 to 20 percent down from the high."