Wednesday, February 15, 2012

What Does Weakness in the Dow Transports Portend?

I am not a proponent of the Dow Theory position that sustained gains in stock prices cannot occur unless the major Dow Averages (Industrials, Transports, and Utilities) "confirm" each other.  However, the Dow Jones Transportation Average has broken down technically.

Particularly curious--and potentially troubling--is the weakness in rail stocks.  If the U.S. economy is improving and the manufacturing sector in particular is improving, why wouldn't rail stocks be stronger performers?  I especially wonder this because last year's leaders, defensive stocks with high dividend yields, have lagged the returns of more cyclical stocks so far this year.

I think the high levels of investor sentiment warrant a cautious position toward stocks after the 20-40% gains in many stocks over the past three months.  The weakness in the transportation sector adds further support to this position.

Steve Lehman

S & P 500:  1343

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