×

Classic theory could put the market in jeopardy

Transportation stocks have been stuck in reverse.

The Dow Jones transportation average has fallen 19 percent in 2015, widely underperforming the Dow and S&P 500, which are down 3 and 2 percent respectively year to date. According to some market participants, the dismal returns could be flashing a warning sign to the overall market.

"This [underperformance] really brings in the concern about the Dow Theory," Craig Johnson said Friday on CNBC's "Trading Nation." Johnson, of course referring to the age-old technical indicator that suggests that steep declines in the transportation index will eventually spill into the broad market. "The industrial stocks haven't been working, and the transports aren't working, either," he added. "That puts a bit of a question mark on the overall market at this point in time."

The transports, which is composed of airline stocks, railroads and shippers, is the second-worst performing industry group behind energy this year. All but one of the stocks in the index are negative in the last month.

Read MoreCiti: Seven warnings signs for stocks in 2016

"The next area of support [for the index] is 7,000," said Johnson. The transports are currently trading under 7,400. But "when you start digging inside of this particular index you are seeing some tops getting put in in the rails at this time … and the truckers look weak," said Piper Jaffray's senior technical research analyst. The economically sensitive stocks have taken a hit from deteriorating U.S. manufacturing activity in recent months.

Manhattan Venture Partners' chief economist Max Wolff agreed that investors should err on the side of caution when looking at the stock market. "This rally is getting a bit long in the tooth," he said in a "Trading Nation" segment. "We think that [the decline in the transports] is an honest macro signal of some weakening that is to be expected in 2016 on a broader economic basis."

Want to be a part of the Trading Nation? If you'd like to call in to our live Wednesday show, email your name, number and a question to TradingNation@cnbc.com.

Videos

Trades to Watch

Trader Bios

About

Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Brian Sullivan

Brian Sullivan is co-anchor of CNBC's "Power Lunch" (M-F,1PM-3PM ET), one of the network's longest running programs, as well as the host of the daily investing program "Trading Nation." He is also a frequent guest on MSNBC's "Morning Joe" and other NBC properties.

Read more

Connect