Will the Transports Continue to Run?

Focus: MARKETS

Richard Moroney Image Richard Moroney Editor, Dow Theory Forecasts

The Dow Transports had a big 2012 but the question remains whether that will continue and what the Dow Theory is telling us at the start of 2013, notes Richard Moroney of Dow Theory Forecast.

Stocks surged after Congress passed legislation that blocks most impending tax increases and postpones scheduled spending cuts, pushing the Dow Transports above their 2012 high of 5,368.93.

The Dow Industrials moved within 1.5% of their 2012 high of 13,610.15, and a close above that level would reconfirm the bullish primary trend under the Dow Theory.

With a close above 13,610.15 in the Industrials, we will be looking for opportunities to add to our equity exposure. However, we'd see a failed attempt at new highs in the Industrials as worrisome, as divergence between the averages around market highs often presages a correction. Our buy lists have 9% to 11% in a short-term bond fund, with the remainder in stocks.

Cyclical Strength
Confirmation-the idea that both the Industrials and Transports must reach new highs or new lows for a valid signal-is central to the Dow Theory. While nothing says both averages must reach new highs or new lows on the same day or even in the same month, divergence between the two averages often reflects uncertainty regarding the business outlook.

The Transports failed to confirm new highs in the Industrials on several occasions in 2012, and that is one reason we have kept a portion of our equity portfolios out of the stock market.

Throughout much of 2012, a breakout above 5,368.93 in the Transports would have been enough for a bull-market reconfirmation under the Dow Theory.