Always consider hidden risks
DJ Transport and Industrials Ratio: A Warning from the Dow Theory ?
Dec 2 ( From Stockchart )
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The US equity market was showing some weaknesses since mid-September 2014. Transports were performing very poorly since then and was a sign for that; it did confirm the last correction of the stock market. But the Transport are strengthening tremendously vs the DJ Industrials since October 15 til November 25 2014.
ONE chart below is worth a look where we will show the ratio of the Dow Jones Transportation and the Dow Jones Industrials compare to the Mighty SP500
( Bottom Chart )...
Observe on the chart below that we reached on November 25 2014
on a ratio basis, the highest level made ever!
Since December 1, the 7 Day Moving Average on that ratio ( DJ Transport started to underperform the Industrials ), indicating a weaker stock market ahead as shown by the charts below...
Dow Jones Transport
Dow Jones Industrials ( Top Panel )
7 DMA ( Blue Line )
and SP500 Index ( Bottom Panel )
Let s start with the Dow theory :
..."In Dow's time, the US was a growing industrial power. The US had population centers but factories were scattered throughout the country. Factories had to ship their goods to market, usually by rail. To Dow, a bull market in industrials (INDU) could not occur unless
the railway average rallied as well (TRAN), usually first. According to this logic, if manufacturers' profits are rising, it follows that they
are producing more. If they produce more, then they have to ship more goods to consumers. Hence, if an investor is looking for signs
of health in manufacturers, he or she should look at the performance of the companies that ship the output of them to market, the railroads. The two averages should be moving in the same direction. When the performance of the averages diverge, it is a warning
that change is in the air."..
The Dow Theory considers such behavior , as a divergence signal of a potential change in the bullish market’s trend.
DJ Transport and Industrials Ratio: A Warning from the Dow Theory ? $DJIA, $DJT, $SPY, $SPX, $ES_F