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Clif Droke

Clif Droke

Clif Droke is the editor of the two times weekly Momentum Strategies Report newsletter, published since 1997, which covers U.S. equity markets and various stock…

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The Message of the Dow Transports

An important market signal was flashed this week, but if you blinked you probably missed it.

The Dow Jones Transportation Average (DJTA) recently made its highest close of the decade to date. The Transports made a token recovery high earlier this week slightly above the 3200 level, something it was unable to do in 2000 and came extremely close to doing, but failed, in 2001. The fact that the Transports were able to make a recovery high sends an important, if only token, Dow Theory signal that the longer-term stock market recovery is still on a firm footing.

The fact that the 30/60/90-week moving averages are in a bullish configuration is even more instructive that the longer-term bull market recovery will continues (shorter-term corrections notwithstanding). This is a recovery pattern, plain and simple, and those Dow Theorists who are bearish should really take note of this development.

Behind every highly developed economy is a transportation sector. Transportation is the lifeblood of the financial system since products must be delivered. It's extremely prescient that the DJTA, and many of its component stocks, have made either token or decisive recovery new highs while many other broad market indices have not. This is the insiders' way of hiding the "invisible hand" of latent strength. Those investors who are bearish on the remaining part of this decade can point to the failure of the Dow 30 or S&P 500 to make new highs to this point, and this will keep their bearish hopes alive. But a true Dow Theorist knows that the undeniable message of the DJTA is pointing to stability at least and to higher prices ahead at best.

Let's take a look at one of the most important of the components of the DJTA -- FedEx. FedEx has not only continued to make higher highs and higher lows over the past several years, but its earnings-per-share has risen right along with price, recently rising to a 10-year high. FedEx is a major indicator of the transportation sector and it's sending an important signal for the longer-term.

The Transports typically turn up or down ahead of the broad market, diverging to the downside from the Dow 30 ahead of a bear market and diverging to the upside. For the Transports to be holding up this well after bottoming in 2002 demonstrates that this is more than just a bear market rally -- it's a recovery bull market rally.

How well the Dow Transports hold up for the remainder of this year will tell us more of what to expect of the road ahead. But considering how well the Transports have held up to date during a 10-year cycle bottom year, it bodes well for the longer-term market outlook.

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