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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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Major Signal in the Dow Transports

Leave it to the bears to put a negative spin on an otherwise positive signal. In the Sept. 20 edition of Barron's, an article appeared with the headline, "The Dow Transports have raced ahead of the Industrials. Bad news for bulls?" The article quoted Dow Theory expert Richard Russell, along with others, on the latest positive divergence in the Dow Jones Transportation Average (DJTA) relative to the Dow 30 Industrials.

Never mind that the Transports have kept rising in bullish fashion this year in spite of spiking oil and gas prices. Pay no attention to the fact that the Transport index has a year-to-date gain of 8% versus a 2% decline for the Industrials. This is actually bearish according to the Russellite interpretation of the Dow Theory. Barron's quoted Russell as saying, "When the Industrials don't confirm [the movement in the Transportation index] it indicates there's a problem. The longer it takes to confirm, the worse."

Maybe this is the way it was in the twentieth century when most of the major long-term cycles were still peaking. But we're now in a new century with a new set of long-term cycles to deal with. I respectfully disagree with Russell's interpretation of Dow Theory. My observations have shown that the Transport index is actually a key leading indicator for the Dow Industrial index, and just because the Transports are rising while the Industrials are declining doesn't necessarily send a bearish signal. In fact, just the opposite is usually the case.

Since the year 2000, the DJTA has led the DJIA at every major turn. For instance, in mid- 1999-to-early 2000 (when the 30-year cycle was peaking), the Transport index made a sharp decline while the Dow 30 index made a new all-time high. This was a clear warning signal that the bear market was on its way. (To Russell's credit, he forecast this bear market in September 1999).

Even more telling, however, was the performance of the DJTA in forecast the end of the bear market in 2002. From 2001 to late 2002, the Transportation index made a double bottom low, refusing to decline below its 2001 major low. During this same time period, the Dow 30 index made a lower low. Obviously then, the Transport index was the leading indicator for the Industrials in this case.

If anything, the desynchronization between the DJTA and the DJIA will mean only that the Transport index will correct at some point in the near future in order to come back closer in line with the Dow 30. But by the same token, the impressive rally in the Transport index is forecasting an equally impressive rally in the Industrial index in the very near future.

Speaking of DJTA, the Transports did something between Friday, Sept. 10 through Tuesday, Sept. 20 that it hasn't been able to do since late August of 1999, namely, close above the pivotal 3200 level. The only other time in the past five years the DJTA has even come close was back in January 2001 when the 3200 level was tested on an intraday basis by the DJTA but it was unable to close above it. I consider the decisive penetration above 3200 by the DJTA this month to be a major bull market signal for the months ahead (once we get past the 10-year cycle bottom in early October). I cannot emphasize how important this Dow Theory signal is from the intermediate-to-longer-term standpoint.

Notice the DJTA has an extremely bullish (longer-term) moving average pattern in its 30-week, 60-week, and 90-week moving averages. All three are in the proper correlation, are rising in unison at a good rate of change, and this hasn't happened since 1998!

It is simply amazing when you consider how well the DJTA has held up all through 2004 when other market sectors were sagging. Even more stunning is how well the Transports as a group have held up in spite of the high oil and gas prices of 2004, not to mention all the airlines that have gone bankrupt. This, my friends, is powerful underlying strength that speaks of a major bull market move ahead in the near future. The bears should be shaking in their fur right now at the message of the DJTA!

In the immediate-term, DJTA has pulled too far away from its moving averages and is likely to correct in the near-term. However, it will most likely remain above its 30-week moving average throughout the duration of the late September/early October 10-year cycle bottom.

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