Are transportation stocks telling us something important about the rest of the economy?
Usually, the Dow Jones Transportation and the Dow Jones Industrial averages move together. But, while the "Transports" index is at record highs, the "Industrials" index hasn't broken above is December 31, 2013 close, although it closed Tuesday just 3.66 points shy of it.
Why does this matter?
Because according to one tenet of a theory developed exactly 130 years ago by Charles Dow, the journalist who co-founded the Wall Street Journal, transportation stocks are supposed to move with industrial stocks. After all, industrial companies hire transportation companies to ship their goods.
[The five other tenets of Dow Theory include: The averages discount every possible factor in the market; the market has primary, secondary, and minor trends; each of those trends have accumulation, participation, and distribution phases; volume must confirm each trend; and trends are in effect until there's a definitive signal that it has reversed.]
The godfather of technical analysis Ralph Acampora, Senior Managing Director at Altaira, says that the only way for this to be a truly solid bull market is for the Dow Jones Industrial Average to break its records.
"When Charles Dow created his averages," says Acampora, "he said that to have a strong economy, you have to have producers of products [the Industrials] and the shippers of those products [the Transports] both making new highs…. When that happens, guys like me are going to be very happy because we will have a confirmed primary bull market."
But, Acampora warns that Dow Theory doesn't serve investors to predict the market's next move. Rather, it lets people know what kind of market they're in.
"I have used it for close to 50 years," says Acampora. "It's not a trading tool and it's never early. But, when it locks in, it locks in for the long-term. For the last three months, it didn't say 'bear' but it said, 'hey, you know, things are kind of wishy-washy,' which is exactly what has happened."
That doesn't mean Dow Theory can't be used by those with money in markets.
"It confirms," says Acampora. "It usually misses the first 10% going into a bull market and it usually misses the first 10% going out into a bear market. But, if you can get 80% of the long-term move up or down, I would be very happy with that. Dow Theory more or less does that."
Acampora says that even though the Dow averages haven't confirmed it, there are other indicators to suggest a bull market now. He notes that market breadth – the relationship of advancing stocks versus declining stocks – has been making new highs.
"So, that in and of itself is strong because it says the move is broad based even though some of the leading averages are not in step," says Acampora. "But I would like to see that 'in-step' happen. It would just make me feel better. I'd sleep better at night."
To see the full discussion on Dow Theory with Ralph Acampora, watch the video above.
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