MorningWord 2/26/14: Dow Theorists Must Be Giddy With Anticipation $DIA $IYT

by Dan February 26, 2014 9:28 am • Commentary

Traders are a weird breed.  Some are superstitious, while others like to piece together potentially unrelated data points and create market timing signals.  I tend to fall in the “wear the same pair of underwear for a week while on a winning streak camp” as opposed to creating market timing theories, but to each their own.

Dow Theory preconditions for a SELL SIGNAL from MarketWatch:

Step No. 1: Both the Dow Jones Industrial Average and the Dow Jones Transportation Average must undergo a “significant” correction from joint new highs.

Step No. 2: In their subsequent “significant” rally attempt following that correction, either one or both of these Dow averages must fail to rise above their pre-correction highs.

Step No. 3: Both averages must then drop below their respective correction lows

So let’s look and see what has happened so far in 2014:

1. The Dow Jones Industrial Average sold off 7.5% from the all time highs made on December 31st 2013.  The Dow Jones Transportation Index also sold off about 7.5% from its all time high made in January.  Not exactly extreme, but at the high end of the sell off range for the last 14 months.

2. The Dow Jones Industrial Average has since regained about 5.5% from the February lows.   The Dow Jones Transport Average has regained about 4% off of the recent lows.  The S&P500 made a new all time high this week.  This under-performance is worth noting and has the potential to cause the third point above come to fruition.

Looking at the chart of the DIA, the etf that tracts the Dow Jones Industrial Average and the IYT, the iShares etf that tracks the Dow Jones Transports, despite neither confirming the new high in the broad market, both act fairly decently:

DIA 1yr chart from Bloomberg
DIA 1yr chart from Bloomberg
IYT 1yr chart from Bloomberg
IYT 1yr chart from Bloomberg

For those Dow Theorists out there though, the next move is gonna be the one to watch as both indices sit on important near term support at their 50 day moving averages (purple lines) and have little support back until the prior lows from the month.  Obviously a break above the recent highs would blow the little theory out of the water.

After getting a good read during Q4 earnings season, I think it is safe to say that the fundamentals in the Transports sector appear to be a mixed bag, with high profile misses from the likes of BA, CSX, EXPD, KSU & UPS.

A look though under the hood of some of the largest components of the Transports shows a more challenged technical picture for those with recent disappointments, which also happen to be some of the 2013’s biggest winners, like BA, FDX and UPS:

BA 1yr chart from Bloomberg
BA 1yr chart from Bloomberg
FDX 1yr chart from Bloomberg
FDX 1yr chart from Bloomberg
UPS 1yr chart from Bloomberg
UPS 1yr chart from Bloomberg

This flies in the face of continued gains of other components like DAL and  UNP make new all time highs:

DAL 1yr chart from Bloomberg
DAL 1yr chart from Bloomberg
UNP 1yr chart from Bloomberg
UNP 1yr chart from Bloomberg

Fundamental macro data is flashing some preliminary warning signs as well, from rail traffic, to ISM or regional manufacturing surveys, to retail sales or payrolls.  However, the cold weather has been the main excuse, so another month or two of data is likely needed to confirm or refute the nascent trend.

Transports led on the rallies throughout 2013, so the relative weakness so far this year is a slight change in the market.  Enis ran through a few other differences so far in 2014 vs. 2013 in yesterday’s Macro Wrap.  We will likely know quite soon whether the market regime has indeed changed, and the Dow Theory’s confirmation or failure is one more sign to watch.