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Usually transports and industrials move together, but we're now seeing a divergence between the two, and you need to know how to play this unique situation, says JJ Kinahan.

I'm here with Joe Kinahan, who's talking about Dow Theory, and you were discussing earlier that there seems to be a diversion between the transports and the industrials. Could you tell us a little bit more about that?

Sure. If you look at traditional Dow Theory, we see that the Dow is up this year a bit over 8%, as we speak, and the transports are down just about 4%, as we speak. So there has to be some coming back together of those. We're either going to have to sell off significantly, or the transportation stocks are going to have to rally significantly.

Whenever the transportation stocks are weak, it does give me a little bit of a pause. Because, again, they're the ones moving things.

And if nobody wants to move things, then...

Nobody's manufacturing things and nobody's buying things.

There is a little bit of a disconnect in the transportation index itself this year, I think. Because we're seeing so much weakness worldwide, you have to take into account that UPS (UPS) and FedEx (FDX)-as well as Delta Air Lines (DAL), United Airlines (UAL)-are big factors in the transportation index where they're having weaknesses actually overseas.

Now, the railroads had a nice string going-they were looking good, but have stumbled a little bit recently; although it's kind of interesting to me that they've gotten a few upgrades. I actually think right now you have to keep your eyes on what the railroads are doing in terms of what's really going on in transports.

I mean, again, railroads-it's like people think, "What is this, 1930? Why do I care about that?"

Why you care about that is that they move a lot of the coal that people need, they move a lot of the cars, and they're actually a much more vital part of our economy than I think most people give them credit for. So if the railroads are healthy...and they're used primarily domestically also. That tells you our domestic economy is doing well, and right now, they've done OK so far this year.

How are the trucking companies doing? I mean, because rail and trucking...

Yeah, rail and trucking-trucking gets a little bit kind of messed up also because they're also involved on some contract work sometimes, if things are going really well with UPS and FedEx, so they could have a little bit of a problem there.

They're doing OK...kind of stumbling along right now, but you have to be very careful, because there are a lot of elements that go along with that.

I guess the take away really is we know that Europe is weak. The dead zone, as many call it, instead of the Eurozone. But I think really what you have to focus in on is what's going on domestically.

Listen to-we're heading into fourth-quarter earnings season here. I think what the CEOs tell us on those calls will really tell us for the end of the year and the first quarter of 2013 how to think about this.

Yeah, it seems like every earnings season for the past six quarters has been we've got to find out what they're going to say this quarter.

Yeah.

They're kicking the can down the road, but it's...

I think our focus has changed every quarter, though, also. It was the financials, then it was the tech, and I think for this one it has to be the transports.

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