×

A ‘vicious’ decline in these stocks could put Dow 22K in jeopardy

As the Dow Jones industrial average crossed 22,000 for the first time ever, one of the index's key counterparts is stalling.

The Dow transports have fallen 10 out of the last 13 sessions and some market watchers have expressed concern that a classic theory is at play that could be hinting at a correction.

The Dow Theory maintains that a divergence between the Dow and the Dow transportation indexes usually signals that a sell-off is on the way. This year, the Dow has rallied more than 11 percent while the transports have actually only risen by 1 percent. What's more, while the Dow continued to hit record highs and climbed 3 percent in the last month, the transports actually tumbled about 4 percent over the same time period.

In other words, the feared divergence is in the works, and the fundamentals and technicals aren't looking strong, says BK Asset Management's Boris Schlossberg.

"The transports chart looks really ugly," the strategist said Wednesday on CNBC's "Power Lunch." "It's about to fill that gap from May, and it doesn't have any support until about 8,800."

"The thing about the transports chart that I think is interesting is the viciousness of the decline, and that could very well be the telling point of how fast the Dow can turn the other way and surprise people going forward."

What's more, Schlossberg believes that the growth in certain groups such as autos and coal has "slowed materially," which could mean that "the second-half growth that a lot of people may be looking for may not be coming, and that could be an excuse for a sell-off. "

But not everyone believes the classic Dow Theory is at play. Craig Johnson, senior technical research analyst at Piper Jaffray, believes that now is too soon to tell if the transports could actually be pointing to a correction.

"When you just look at the bottom panel and you look at the lines, you can see that you get a series of higher highs and higher lows still happening on the transports," said Johnson, also on "Power Lunch." "So just because we've been weaker over the last several sessions, I wouldn't identify this as a warning sign for Dow Theory yet."

If anything, Johnson says he would "stay on the long side" of the market, as he believes there's even more room to run for stocks.

The Dow transports broke a two-day losing streak on Wednesday, while the Dow hit its sixth straight record close.

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