According to one of the oldest and most-respected market models, transportation stocks need to confirm new highs in the Dow Jones Industrial Average.
That’s why some Dow Theory adherents have fretted over the recent divergence in the Dow and the iShares Dow Jones Transportation Average (NYSEArca: IYT). [Transportation ETF Lagging the Dow Worries Bulls]
One tenet of Dow Theory is that in a healthy bull market, transportation stocks should join the rally because they benefit from manufacturers shipping more goods.
“Actually, there is something new to worry about. A Dow Theory divergence has developed between the Dow Jones Industrials and the Dow Jones Transportation indexes,” according to a recent Yardeni Research blog post.
The Dow Jones Industrial Average is testing its highest levels since 2008 after the summer rally.
Yet IYT, the transportation ETF, has been trending lower in 2012.
“The theory is that if the transportation stocks aren’t confirming the strength in the stocks of industrials companies, then look out below,” Yardeni said.
However, he doesn’t see signs of a major divergence and says it wouldn’t take much for industrial and transportation indices to “converge in a more bullish fashion.”