Friday, August 10, 2012

The Divergence of the Dow Transports and the Dow

As if on queue from my posting yesterday, Mark Hulbert  (read all his stories here) writes on about the divergence between the Dow Industrial index and the Dow Transports.  He shows a graph which is very interesting and may help answer the questions I raised yesterday when I asked how the economy (as measured by the stock market) could be so high yet freight growth appears to be crawling along. His graph (reproduced below) shows for some time now the Dow Transports have lagged the overall Dow.  I suspect if you put in the S&P500 you will see this as well.

Dow Transports (in Red) Versus Dow 

So, what does this tell us?  Mark believes it may signify the leading indicator of an overall slowdown in the economy (which of course does not bode well for the transportation industry).  However an interesting point which I had not followed before is his point around the divergence or the relative performance of the Dow Transports to the Dow overall.

He claims (as apparently it is in Dow Theory) that it is precisely this divergence which indicates the slowdown not specifically the fact that that transports are slowing down.

Perhaps it is best to think about it this way, like a good race horse, the Dow is executing one last gasp then it will stop where as the other race horse (i.e., the transports) already crossed the finish line and is stopped.  I don't know if that is a good analogy or not however I will set a favorite to always compare the Dow transports to the Dow overall now and let's see how his analysis plays out.

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