SPDR Dow Jones Industrial Average ETF (NYSEArca: DIA) is trading at the highest level since 2007 on improving sentiment on the economy and the latest round of monetary easing from central banks.
However, iShares Dow Jones Transportation Average (NYSE: IYT) continues to languish in sideways trading and hasn’t yet confirmed the breakout in the major stock indices.
The transportation ETF is about flat for the year, while the Dow Industrial fund has gained roughly 13% in 2012.
Investors might not care about the underperformance of the transportation sector ETF, but the lackluster trading bothers adherents of Dow Theory, one the oldest and most respected models for timing the market. [Transportation ETF Trying to Play Catch-Up]
One tenet of Dow Theory is that industrial and transportation averages should confirm new highs together in a healthy bull market.
“If traders believe in the Dow Theory and its ‘train’ of technical thought which holds confirmation between the industrials (DIA) and transports (IYT) as sacrosanct, bears may be looking to climb on board the market,” writes Chris Tyler for Optionetics. “Despite the DIA setting fresh multi-year highs, the IYT has gone from attempting to break out of a neutral, but bearishly-positioned symmetrical triangle to a quick test of pattern support on Thursday.”
“The Dow Transports surged to resistance last week and plunged to support this week,” says Arthur Hill at StockCharts.
The Dow Jones Transportation Average has been stuck in a trading range since mid-June, and a break below support would be clearly bearish for the sector and negative for Dow Theory, he added.
Dow Jones Transportation Average