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Classic theory predicts more pain for stocks, technician says

The transports have fallen 5 percent from their 2016 high, and if one classic theory holds true, the market could soon tumble with them.

On CNBC's "Options Action" Friday, top technician Carter Worth said the recent underperformance in the transports could soon trickle down to other equities. The Dow Theory, as it is called, maintains that the market is in an upward trend if one of its averages, including transports, surpasses a previously important high. But the opposite could also hold true if one of the averages goes down, and he believes that such a drop may be on the way.

"Transports [have really been] dragging over the past two years," said the head of technical analysis at Cornerstone Macro. "In fact, the numbers speak for themselves [with transports] down 4.5 percent versus the S&P 500 [up 8 percent]."


This stands in contrast to trends seen starting from 1980. For more than 30 years, transports outperformed the S&P 500 by almost 50 percent while the market index continued its rise. This makes the IYT's two-year underperformance versus the S&P 500 significant as the transport ETF's reversal could mean the market is headed down.


Furthermore, Worth noted that the transports are butting up against downtrend resistance, and after a countertrend rally he believes new lows could be in the cards.

The transportation average was slightly lower Monday while the S&P 500 was up modestly.

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