Breaking News
Investing Pro 0
🚨 Our Pro Data Reveals the True Winner of Earnings Season Access Data

Dow Theory Suggests Caution

ca.investing.com/analysis/dow-theory-suggests-caution-200537523
Dow Theory Suggests Caution
By Mike Zaccardi, CFA, CMT   |  Nov 21, 2022 05:18
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
 
US500
-1.11%
Add to/Remove from a Portfolio
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
DJI
-0.61%
Add to/Remove from a Portfolio
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
BA
-0.59%
Add to/Remove from a Portfolio
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
CAT
-0.32%
Add to/Remove from a Portfolio
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
MMM
-1.41%
Add to/Remove from a Portfolio
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
DIA
-0.61%
Add to/Remove from a Portfolio
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
  • The Dow Jones has sharply outperformed the Transportation Average
  • The former is on the cusp of breaking out above its August peak
  • The latter is well underneath its summer high
  • Technicians can easily spot this bearish non-confirmation as equities rise

The Industrials sector has powered the S&P 500 higher since early October. Much fanfare was made about the Dow Jones Industrial Average notching its best month since 1974, but technicians often like to look under the hood to see what’s driving price action. 

The past seven weeks or so have featured blue-chip multinational Industrials soar in price, much of the gains coming from positive earnings reports. Shares of Caterpillar (NYSE:CAT), Boeing (NYSE:BA), Honeywell (NASDAQ:HON), and 3M (NYSE:MMM) have provided years’ worth of gains over a handful of weeks.

S&P 500 Sector Performances Since October 6: Industrials Leading

S&P Sector Performance
S&P Sector Performance

Source: Stockcharts.com

Transports, while up impressively from their October low, are not quite as bullish as large-cap diversified indexes. That reality catches the attention of technicians everywhere. The century-old Dow Theory, among its six tenets, says that price indexes must confirm each other for a healthy trend to be in place. Right now, I see a decoupling between the DJIA and the Dow Transports.

Let’s start with the positive piece—the Dow 30. Notice in the chart below that the DJIA is comfortably above its 200-day moving average and making a run at the August high. The price-weighted index’s chart, with UnitedHealth (NYSE:UNH) as the biggest holding at more than 10%, looks better than so many other areas of the market. The last several sessions have the hallmarks of a bull flag pattern to me, implying the next move will be to the upside. But do the transports confirm that bullish outlook?

Dow Jones Industrial Average ETF: Above Its 200-DMA, Probing the August High

DIA Daily
DIA Daily

Source: Stockcharts.com

The answer is no. The above Dow Jones Industrial Average SPDR ETF (NYSE:DIA) chart contrasts with the iShares Transportation Average ETF (NYSE:IYT) in that the latter is well below its August high and failed again at rising above its 200-day moving average. Not even lower oil prices lately have helped the transports. Dow Theorists, and technicians more broadly, must monitor the August highs on both of these ETFs. We are in bearish mode, confirming the overall cyclical bear market, until new rebound highs on both the industrials and transports are made.

Dow Jones Transportation ETF: Below Its 200-DMA, Underperforming

IYT Daily
IYT Daily

Source: Stockcharts.com

So, the focus is on the transportation average, specifically. We can look for additional clues using historical seasonal patterns. According to Equity Clock, IYT often struggles somewhat against the S&P 500 now through early January. Despite this being a positive time on the calendar for much of the equity market, transports sometimes do not lead the way. They do, however, perform relatively well starting in early January through early May. It is one sign that some volatility could be on the horizon for the broad market which might be the contrarian take.

A Not-So-Cheery Time of Year for IYT Vs. the S&P 500

IYT Vs. S&P Weekly
IYT Vs. S&P Weekly

Source: Equity Clock

The Bottom Line

The Dow Theory waves a caution flag right now as the transportation average is sharply underperforming the DJIA. Bulls want to see alpha out of IYT to help give legs to the current rally.

Disclaimer: Mike Zaccardi does not own any of the securities mentioned in this article.

Dow Theory Suggests Caution
 

Related Articles

FactSet Research Systems Inc
Podcast : Financial Market Preview - Wednesday 8-Feb By FactSet Research Systems Inc - Feb 08, 2023

US futures are indicating a lower open. European equities markets have opened with gains as the benchmarks catch up with the overnight US action. Asian markets ended mixed. Markets...

Lance Roberts
Bull Now, Bear Later? By Lance Roberts - Feb 07, 2023

Last week, we discussed why the more bullish technical formations were at odds with the many recession forecasts. Not surprisingly, that article generated substantial pushback from...

Dow Theory Suggests Caution

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email