Always consider hidden risks
DJ Transport and Industrials Ratio: Dow Theory Warning ?
Oct 7 ( From Stockchart )
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The US equity market was showing some strenght in September 2014 making a new high on September 19. Transports were performing very strongly since then and was a sign for that it did confirm the last push of the stock market.
But the Transport are weakening tremendously vs the DJ Industrials since September 19 2014.
ONE chart below is worth a look where we will show the ratio of the Dow Jones Transpotation and the Dow Jones Industrials compare to the Mighty SP500
( Bottom Chart )...
Observe on the chart below that we tested on September 19 2014
on a ratio basis, the highest level made of the past 3 years!
Since September 19, the 7 Day Moving Average on that ratio ( DJ Transport started to underperform the Industrials ), indicating a weakerer stock market ahead as shown by the charts below... ( Mini Chart is on a 6 months time frame ).
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 early warning signals of a potential change in the market’s trend.
But we will need to break the major support trendline on the SP500 to confirm that change in trend ( now at 1962 )...
DJ Transport and Industrials Ratio: Dow Theory Warning ? $DJIA, $DJT, $SPY, $SPX, $ES_F