Should we worry very much about the eight consecutive losing sessions that the Dow Jones Transportation Average has suffered? It’s not how many that matters, it’s how much.
Charles Dow is considered by many to be the father of modern technical analysis, in spite our now knowing that Japanese rice trader Munehisa Homma started using candlestick charts more than a century earlier. While Dow Theory may be pretty dated these days, it still is studied and still has something to say in modern technical analytical theory, particularly Dow’s insights on his three main types of market trends, the accumulation, absorption, and distribution phases.
The consolidation phase has replaced Dow’s absorption phase, which Dow held to be the period where those “in the know” were fading the public, and while this still goes on, this has lost a lot of significance in the information age. Dow’s contributions to the study of markets are still pretty substantial though given that back in his day this was an entirely new science, and he did indeed break some important ground.
Dow also founded the Dow Jones Company back in 1882 with fellow financial reporters Edward Jones and Charles Bergstressor. Although the company has changed hands several times since, currently owned by the News Corporation, it still plays a very prominent role in the world of financial publications and data services, starting with its flagship, the Wall Street Journal, which Dow also helped found.
Charles Dow is much more famous among the public for is creation of the Dow Jones Industrial Average (DJIA), which stands alongside the S&P 500 and the Nasdaq these days as the three most prominent stock indexes in the United States and is also among most followed in the world. The Dow, as the index is often referred to, is so prominent that many simply refer to it as “the market.”
Charles Dow’s first index wasn’t the DJIA, it actually was the Dow Jones Transportation Average, which started out as 9 railroad companies, a steamship company, and Western Union. This was put together at a time where railroads were king, and these were the companies that you wanted to look at if you wanted a good idea of where stocks were at.
While Dow Transports doesn’t get anywhere near the attention that the DJIA does, it is still looked at by many. It also played a prominent role in Dow Theory, for the reason that transportation companies can be seen as a bellwether of American business, and if goods are moving around well and these companies are doing well in turn, or not, can in itself provide at least some additional insight into the overall business climate of the day.
We use a lot of other metrics these days to measure this, but at least some do feel that this index has something to say beyond how transportation stocks are doing. Dow believed that this index is a leading one, and although in today’s world it doesn’t lead anywhere like it used to, it still can provide meaningful comparisons and correlations with the bigger indexes.
Dow Transports Has Slid for 8 Days in a Row Now
Today’s Dow Transports consist of 20 major transportation companies, involving all major modes of transport. With so much globalization these days, the Transports do serve as a more reliable indicator of domestic economic health than the broader exposure with DJIA components generally.
As of the close of Tuesday, the Dow Jones Transportation Average has now declined for 8 sessions in a row, which hasn’t happened since all the way back in 2011. Given that this has happened in conjunction with the DJIA trading mostly sideways, some see this as perhaps an indicator that the main average may have bearish leanings as well, which may be just around the corner.
Movements of this scope may only be seen as relevant to those who are currently looking to time their positions, either to enter or exit them, and investors generally don’t do much of that, and especially aren’t too concerned with anything that happens over a mere 8 sessions, unless the magnitude of the total move is dramatic.
However, all large moves start out as smaller ones, and whenever we see a pullback or the makings of one, even though the duration may be rather short, this attracts a lot of attention from a wide breadth of market participants.
This is far from the case with the sum of these consecutive losses though, where Dow Transports have only given back 2.5% during this time. This index has actually outperformed the main Dow so far in 2019, so we might just want to say that it might be shedding some of this excess.
Even after this losing streak, the Dow Transports are still up 12.5% this year, and still have a healthy lead over the DJIA’s 10.6% increase.
The degree of a move is much more important than how many times an index has finished down, even though both can be seen to be at least somewhat informative. 2.5% is not a lot though to be concerned about in itself in the face of what has been a stall in the current upward trend of markets.
This Might Be Not That Bearish At all
Rather than being seen as a bearish indicator, we might instead choose to perceive this shallowness of a move during these consecutive losing sessions as demonstrating a lack of selling resolve. Often, investors will pile on a selling trend, and this has been absent thus far from this string.
Frank Cappelleri of Instanet points out that this is “the most shallow decline of any eight day losing streak since 1990.” Indexes that string together this many do generally demonstrate more resolve to the downside than this, and therefore we perhaps shouldn’t be too concerned that we have had eight, and start to pay real attention when the cumulative loss increases much more substantially.
Given that the broader DJIA is only down 0.2% over this time also serves to calm any fears of this, and observers are more concerned with a lack of progress so to speak lately then any sign of a real failure of the current bull trend.
The last time we saw this many consecutive down days with the Transports, the DJIA gave back 7%, and that is more the sort of thing that tames the bulls and brings out the bears. We could indeed see the big index drop this much during this current run, but it hasn’t happened yet and may not for a while, as we have evolved into stagnation right now, not a correction of any great significance, with either index.
Money is said to be waiting on the sidelines for more direction to be either put in stocks or taken out of them depending on how things go in the near term, especially with the outcome of the U.S.-China trade talks. There is little doubt that the fruits of a successful outcome have already bene absorbed by the indexes though, so even that will probably not have the significance some expect.
The fact that a fairly prominent index like the Dow Transportation Average is headed the wrong way for so many days in a row therefore should not worry the bulls too much, even though this does not mean that these things aren’t worth keeping an eye on in addition to all the other things we look at to seek market insight.