While the Transportation sector and related exchange traded funds have shown some weakness, the recent sideways market has not been enough to signal a major sell-off under the Dow Theory.
The Dow Theory stipulates that the market is in a prevailing up or down trend if one of its Industrial or Transportation Averages advances above or bellow a previous notable level and is accompanied by a similar rise or fall in the other.
So far, the Dow Jones Industrial Average has been hitting new highs, but the Transports Average has not confirmed the overall uptrend. The Dow has made three new closing highs since January while the Transportation Average has been stuck in a downtrend, reports Kenny Polcari, director of NYSE floor operations at O’Neil Securities, for CNBC.
Dow Theorists have been anxious after the iShares Transportation Average ETF (NYSEArca: IYT), which tries to reflect the performance of the Dow Jones Transportation Average Index, bounced back-and-forth around its 200-day long-term average and dipped 4.9% year-to-date, potentially signalling weakness ahead for the SPDR Dow Jones Industrial Average ETF (NYSEArca: DIA), which tracks the Dow Jones Industrial Average. [Transport Average, ETF Pullback Shake Dow Theorists]
However, before investors start shouting doom and gloom, Dow Theory has not generated a proper sell signal. Specifically, the Dow and transports have not experienced a significant correction off the highs. From the correction, both indices would need to fail to top their pre-correction highs. Lastly, both indices would have to decline below the correction lows.
So far, none of the traditionally bearish Dow Theory signals have manifested. While transports show some weakness, traders remain cautious ahead. Consequently, the equities market has been slowly marching ahead, without the full blown optimism in a traditional market rally.
Polcari suggests equities investors should remain cautious and conservative ahead.
“No need to go gangbusters and reach for stock — patience is a virtue and taking the time to assess your plan and take strategic advantage of weakness will be the winning strategy,” Polcari said.
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Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, 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.