Dow Transports Lagging

01/20/2011 10:00 am EST


Thomas Aspray

, Professional Trader & Analyst

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Chart Analysis: The transportation stocks, as represented by the Dow Jones Transportation Index, have been one of the leading sectors since the market bottomed. From the lows in March 2009 until last Friday’s close, the Dow Jones Transports are up 145% versus a 94% gain in the S&P 500.

In late December, I last discussed the Transports and gave an upside target at 5250, which was reached last week. One tool that I use to find the strongest sectors or stocks is the relative performance, or RS analysis. It compares the performance of a stock or major average to the S&P 500. As the market was bottoming last summer, the RS (in red) formed higher highs, suggesting that the Transports were leading the S&P 500.

  • Since the summer lows, the Dow Transports have gained 4.5% more than the S&P 500

  • The RS line (chart through Jan. 19) has turned lower after peaking below the early-December highs

  • The RS has dropped below its 21-day weighted moving average (WMA)

  • Volume in the Transports has increased as they have headed lower

  • A weekly close below 5090 will suggest a decline to 4820-4960

What It Means: The changing RS analysis of the Dow Transports suggests that the market is likely to correct further. The alternative interpretation is that we are seeing sector rotation and that another sector is going to take over. The advance/decline ratio was over three-to-one negative yesterday, which is not a positive sign.

How to Profit: The analysis of the Transports is likely giving us a warning that the long-awaited correction is finally underway. The intermediate trend is still positive, so this should be a buying opportunity with first support for the S&P 500 at 1250-1260 and then at 1230.

Tom Aspray, professional trader and analyst, serves as senior editor for The views expressed here are his own.

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