Dow Theorists Wait For Transports to Confirm

In bull markets, you want to see both the Dow Jones Industrial Average and the Dow Jones Transportation Average making new highs together. Dow Theory suggests that when one of these gets left behind and doesn’t confirm the other, something is wrong and there should be cause for concern.
Last week the Dow Industrials closed at new all-time highs, and now sit above their May closing highs. Meanwhile, the Transports are still almost 2% from their May highs. So if you believe in Dow Theory, you want to see these transporation stocks get going quickly.
My friend Jonathan Krinsky, CMT over at Miller Tabak has a note out this morning discussing the current divergence:

“The Transports, however, should certainly be given some attention this week. The TRAN index made its all-time closing high on May 17th. Prior to last week, the DJIA all-time closing high was May 28th. So there was already a slight “non-confirmation”, but from our perspective, the time between the two highs was not sufficient to classify as a true “Dow Theory non-confirmation”.
The current divergence, on the other hand, would be nearly two months in the making (chart below). Of course, this could easily resolve itself with a rebound in key transport stocks such as United Parcel Service (UPS) and FedEx (FDX). The index is less than 2% away from those May closing highs. Until then, however, this is a small divergence that Bulls would certainly like to resolve sooner, rather than later.

Bottom Line: It is hard to ignore the strength that was seen last week. Much like “The Running in Pamplona”, Bulls pretty much did everything they wanted, with an unrelenting climb. With most momentum indicators running in overbought territory, the NDX coming off 13 consecutive up days, and a potential “Dow Theory Non-Confirmation”, however, we are still hesitant to chase stocks without at least a few days of consolidation.
That does not mean that stocks are huge short-sales, however. There is very little evidence of a broad based decline, at least yet. Our point is that sometimes holding-off on aggressively buying, and waiting for better opportunities is the correct strategy.”

I think something else worth noting is the NYSE Composite. Because of all the ADRs and REITs in that average, it’s by far the worst of the US Stock Market gauges. We’re paying attention to that.

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