Trading the Dow Theory Divergence

Focus: MARKETS

Joe Kinahan Image Joe Kinahan Chief Market Strategist, TD Ameritrade

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.