Sector Showcase: Transport strength reconfirms Dow Theory uptrend

July 11, 2017 03:41 PM

"Dow Theory" refers to a method for analyzing the stock market originally fleshed out by Charles Dow in a series of editorials all the way back in 1900. The theory has been further refined since then, but the basic tenets of Dow Theory form the foundation for much of the technical analysis conducted today.

In addition to valuable contributions on analyzing trends across multiple timeframes, volume analysis and early musings that preceded the Efficient Market Hypothesis by half a century, Dow Theory posits that both the Dow Jones Industrial Average and the lesser-followed Dow Jones Transportation Average must confirm one another. In other words, the fortunes of both the companies making products and the companies transporting those products tend to fluctuate together, and the trends in those performances can help determine the health of the stock market and economy as a whole.

Nowadays, plenty of disclaimers abound when it comes to Dow Theory. After all, certain companies in the DJIA aren't really industrial companies rely on manufacturing goods (see stocks like American Express, Disney, Goldman Sachs, JP Morgan, Travelers, United Health and Verizon, among others) and the definition of "transportation" has become similarly muddled (e.g. should companies that support cable / wireless infrastructure be included in the digital age?). Despite these potential flaws, Dow Theory remains a popular and effective way to determine the dominant trend in the U.S. stock market.

The reason we're mentioning all of this is because of the recent price action in the DJTA recently (re)confirmed the long-term uptrend in stocks.  As the chart below shows, the DJTA closed last week at an all-time record high near 9700, eclipsing the February high in the 9600 area. Take a look at the chart below.

Source: Faraday Research

This move confirms June's record closing high in the Dow Jones Industrial Average.

With U.S. equity markets seemingly undergoing a potential sector rotation away from strength in the "FAAMG" technology stocks, the transportation sector appears to be one of the industries picking up the slack (see "Sector Showcase: "Tech wreck" gives other sectors a chance to pick up the slack" for more).

For traders who prefer to zero in on specific stocks, the largest holdings in the biggest transportation sector ETF (IYT) are FedEx (FDX), Norfolk Southern (NSC), United Parcel Service (UPS), Union Pacific (UNP) and Alaska Air (ALK).

About the Author

Senior Technical Analyst for FaradayResearch. Matt has actively traded various financial instruments including stocks, options, and forex since 2005. Each day, he creates research reports focusing on technical analysis of the forex, equity, and commodity markets. In his research, he utilizes candlestick patterns, classic technical indicators, and Fibonacci analysis to predict market moves. Weller is a Chartered Market Technician (CMT) and a member of the Market Technicians Association.