How to Use the Dow Jones Transportations Average to time the Stock Market


How to Use the Dow Jones Transportations Average to time the Stock Market

As a trader you have likely already heard about the notorious Dow Jones Industrial Average.  The index tracks 30 of the United States biggest companies, and was started by the infamous Charles H. Dow.  It is often referred to as just the “Dow”.

However, there is another Dow Jones index that helps predict market sentiment extremes and major recessions.

Today we’ll talk about the Dow Jones Transportations Average.  Often called just the “Transports”.

What is the Dow Jones Transportations Average?

Dow transports are are actually the oldest stock market index in the world.

The Dow Jones Transportations Average is a running total of 20 of America’s largest transportation companies.

This index include companies that engage in trucking, delivery services, railroads, airlines and marine freight.

Think of this index as the combined value of companies that move raw goods and people across the country and globe.  These are real products and very representative of overall economy stability.

No matter what product or service you use, there have been components and good shipped through these big twenty companies at some point.

As a trader, this index is a very important correlation and confirmation tool.

Read more about stock market correlations and why they are the best indicator in this article.

 

Dow Theory – The Averages Must Confirm Each Other

The Charles Dow Theory was compiled after his death in 1902, from 255 Wall Street Journal articles he wrote personally.

One of the key tenets is that both the Dow Industrials (the Dow) and the Dow Jones Transportations Averages (Transports) must confirm each other.

This means that if the Dow is moving upward but the Dow Jones Transportations Average are not, the likelihood of more upside drops significantly.

In fact, this simple Dow Theory tenet that was published over 115 years ago has predicted most recessions with remarkable success.

 

Dow Jones Transportations Average Predict Big Sell-Offs

Here is an example of a chart showing instances where the Dow Jones Transportations Average led the way lower long before the broad markets fell.

For visibility and relevancy purposes, I’ll only use data since 1998.

The longer back you go, you will find this rule still holds true but the data can’t be used to predict future moves because the market has evolved greatly since the tech boom and bust.

  • March 1998 to August 2000 the Down Jones Transportations Average (Transports) did not make new highs and were range bound – this preceded a 48% drop in 777 days – and became known as the big “Tech Bubble”
  • In June of 2007 to October 2007 the transports did not make new highs and created a double top chart pattern – this preceded a sharp drop of 57% in 518 days (less than the previous crash) and became known as the “Housing Bubble”
  • September 2014 to July 2015 the Dow Jones Transportations Average sold off sharply, although it was highly over price in comparison – this led to a 14% drop in 217 days (because transports were higher, the SP500 did not drop as much)

 

What are the Dow Jones Transportations Averages Saying Now?

The drop in the Dow Jones Transportations average in early July led to a two week 1.9% sell off in the SP500.

This was not a material move, and the transports have since rallied to their highs.

It is very interesting to watch this index over the next few weeks, to see if it will drop from highs and signal a larger scale sell off in the markets.

For the time being, it is showing signs of a healthy rally and a continuation to the upside.

 

Dow Jones Transportations Averages – Conclusion

No tool in trading is perfect.

But every tool that is around can be useful in the right circumstances as a trader.

The Dow Theory has been around since 1902.  The moving averages confirming themselves has been a rule that has been remarkably precise.

Every profitable and professional trader knows this relationship and tracks it actively.

Now you can too.

Good luck and good trading.

 

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The information contained in this post is solely for educational purposes, and does not constitute investment advice. The risk of trading in securities markets can be substantial. You should carefully consider if engaging in such activity is suitable to your own financial situation. TRADEPRO Academy is not responsible for any liabilities arising as a result of your market involvement or individual trade activities.