About that Underperformance in the Dow Transports

In case you hadn't heard, the Dow Jones Industrial Average is back to levels not seen since 2007. But the big news over in my neck of the woods is coming from the Dow Jones Transportation Average, which is sitting near multi-month lows. This lack of confirmation drives the Dow Theorists crazy. However, looking at recent history, our research shows that short-term divergences in these two averages are normal. Look back and check out how many times we've seen one get ahead of the other, only for the laggard to then play catch-up:

So while this divergence may stand out to some of us shorter-term players, I don't think it really means much in the big picture. In fact, according to Bespoke, peaks and troughs in the performance spread between these two averages haven't been bullish or bearish for the future direction of the market. Take a look at the rolling six-month ratio for $DJIA:$TRAN:

I realize that the lack of short-term confirmation from the transports makes for nice headlines and scares the crap out of people. But the math says otherwise. History's worst case scenario here is a likely reversal in relative performance, meaning that soon the Transports should start to outperform the Industrials. But that doesn't necessarily mean that the absolute value for the Dow Industrials needs to decline. It is also possible that the Transports just go up faster.

My conclusion is that the underperformance in the Dow Jones Transportation average is fairly meaningless. So to get bearish in US equities, I would look for other reasons besides this one data point.

Sources:

The Plight of the Transports (Bespoke)

Dow Theory Warning Sign: Transports Crushed This Week (WSJ)

Tags: $IYT $TRAN $DJIA $DIA