Dow Theory: Transports ETF Makes Up Lost Ground

October 24th at 10:08am by John Spence

U.S. equities have stumbled a bit in October but one encouraging sign for the bulls is that the transportation sector has been leading the broader market.

The underperformance of the iShares Dow Jones Transportation Average (NYSEArca: IYT) in the third quarter caught the attention of many technical analysts as a potential warning sign.

However, for the month ended Oct. 23, the transportation ETF is up 3.5% compared with a 3.4% loss for SPDR Dow Jones Industrial Average (NYSEArca: DIA).

According to Dow Theory, industrial and transportation averages should confirm new highs together in a healthy bull market. [Transportation ETF Still Lagging]

The transportation fund has been consolidating in 2012 but bulls are looking for a decisive breakout from the trading range.

“Much noise has been recently made about a divergence in price between the Transports and Industrials. Dow Theorists like Richard Russell suggest that there is a Dow Theory sell signal in place,” Jonathan Verenger wrote at SeekingAlpha earlier this month.

Yet he points out iShares Down Jones Transportation Average actually made an all-time high in 2011, unlike the Dow Jones Industrial Average.

“So the move over the past year in all likelihood has been one of consolidation and higher lows,” Verenger  said. “The weekly chart of IYT suggests that there could be an outsized move in transports coming up imminently as it breaks out of this consolidation phase.”

The first chart below shows the relative performance of iShares Dow Jones Transportation Average against SPDR Dow Jones Industrial Average. When the chart is rising, transports are outperforming.

iShares Dow Jones Transportation Average

The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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