A 100-year-old stock market indicator is giving bearish signals, indicating that more trouble lies ahead for investors.

  • A bearish divergence is developing between the Dow Jones Transportation Index and the Dow Jones Industrial Average.
  • While the transport index hit a higher high in January, the average transport index did not rise.
  • The Dow Theory is a technical indicator with over 100 years of history that suggests that transportation companies are doing well in the economy as a whole.

A stock market indicator from over a century ago is giving a bearish signal that could spell even more pain for investors.

In particular, a bearish divergence has formed between the Dow Jones Transportation and Dow Jones Industrials in recent weeks after the transport indices hit new highs in early February while the industrials remained sideways.

The method of analyzing intermarket relationships between industrial and transportation stocks is called “Dow theory”, which was proposed by S. A. Nelson and improved by William Hamilton and Robert Rea in the 1930s. The original idea comes from Charles Dow, founder of the Wall Street Journal, who published hundreds of editorials on the subject before his death in 1902.

The general idea is that both averages should change in tandem over time, given that the transport average represents the companies responsible for moving goods around the country. For this reason, it should serve as a leading indicator.

The Transportation Index, whose origins date back to the late 19th century, is made up of a variety of transportation companies, including logistics companies such as FedEx and UPS, airlines, and railroad operators such as Union Pacific.

Dow theory suggests that the relationship between the two indices can send investors a broader signal about the future direction of the stock market.

Transportation and industrial averages should eventually confirm new highs or new lows in the market, and when they don’t, investors should start paying close attention to them.

The Dow Theory’s initial bearish signal came in early 2022, with the manufacturing average reaching a new all-time high and the transportation average not following suit. The exact opposite is happening now, with transportation stocks leading the way and industrial stocks fluctuating on average.

“The Dow Jones Industrial Average and the Dow Jones Transportation Index have struggled to climb to new highs together, which is necessary to offer a more bullish setup for the Dow Theory,” Stephen Suttmyer of Bank of America said Tuesday.

“These bearish divergences in late 2022 and early 2023 show stock market disunity, keeping the Dow Theory bearish signal from early 2022,” Suttmyer said.

For now, Suttmyer said that the swing of sentiment between bullish and bearish investors is leaving the stock market unsure which direction to take, as are the Dow Jones Transportation and Industrial indexes.

Bank of America

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