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Transports & Industrials Can’t Both Be Right: Lydon


A recent WSJ write-up extolling the stock market's ascent to new highs made the paradoxical point that "the bulls have just about everything going for them... except the economy." Think about how crazy that is. It's equivalent to saying, "I am all packed and ready to go, except for my clothes."

It is also the one reason why such a large performance rift has emerged between the Dow Jones Industrial Average (^DJI) and the Dow Jones Transportation Average (^DJT), with the former up 11% and the latter down 1% so far this year. As a result, the the age-old debate over the Dow Theory has been stoked, with adherents and skeptics squaring off in the high stakes game of chicken that's currently being played out on Wall Street.

For those unfamiliar with the Dow Theory, it essentially needs to see both the Industrials and Transports moving to new highs together in order to confirm a broad market uptrend, or else the gains of the lone leader may be unsustainable, thus the timeliness of the debate.

I discuss the troubling trend in the attached video with Tom Lydon, the editor of ETF Trends.com, who is of the mind that the breakdown should be respected and its message listened to.

"When you look at the Transports, which really is all about shipping and getting products out to people, it's a fail at this point," he says. While stepping back from calling it a "blazing sell signal" or a perfect indicator, Lydon does urge caution. "As you add it all up, as far as Dow Theory is concerned, it doesn't bode well for the market going forward."

The recent earnings warning from FedEx (FDX) is a perfect example of the reaction chasm in the market place, where shares of the shipper have slid about 5% while the S&P 500 hasn't budged. Sooner or later, one side in this fight will have to admit defeat and need to catch up (or down) with the other, since logic would argue that they can't both be right.

"A lot of people are saying, 'well, we'll sit back and see what the holidays look like,'" Lydon says. "Well folks, as far as manufacturing and delivering goods, it's over. They've already been ordered and they've already been shipped, and frankly, it doesn't look that great from a transportation standpoint."

Not only is he troubled by the split performance, but also the lack of volume that is typically seen in a rising market. He says investors on the fence need to look back to 2007 when you saw the "Industrials hitting higher highs and the Transports falling apart." We all still remember how that played out.

In short, the big takeaway is to be mindful of that everything seems to be working... except the economy.