The recent action seen in the Transportation sector is not good and considerable technical damage has been done. According to Dow theory, the Secondary Trend of the Transports is now bearish. From a cyclical perspective the outlook has been bearish for a month or so and everyday since has just been added confirmation of the now well established bearish trend.
From a Dow theory perspective the Secondary Trend of the Transports first turned bullish in April 2003 when they moved above their previous secondary high point. This can be seen in the first chart below, which shows the Transports from mid-2002 to date. The Secondary Trend was then reconfirmed as being positive again in June 2004, September 2004 and March 2005. From that high it looked as if both the Transports and the Industrials had peaked. In fact, in April 2005 the Transports moved below their previous secondary low point, turning the Secondary Trend back down. However, the Industrials did not confirm that low and then the Transports recovered. This proved to have been a false break. Then, in November 2005 the Transports bettered their previous secondary high point and the Secondary Trend was once again confirmed as being bullish. The Secondary Trend was then continuously reconfirmed as being bullish every month all the way up into the May 2006 high. From that high the Transports rolled over into their June secondary low. The Transports then rallied into early July, but failed to better the previous secondary high point and this is where the warning came. From the July failed top, the Transports were set to retest the June secondary low. In the process, the June secondary low was violated. As a result, the Secondary Trend was confirmed as being bearish. So, for the first time since April 2005 and for the second time since April 2003 the Transports are now in a confirmed Secondary bear market. Until the Transports can better one of its previous secondary high points, lower prices are now expected by this average.
Now I want to take a look at a couple of the sectors within the Transports in an effort to see how these sub-sectors are performing. In the first chart below I have plotted the Dow Jones Transportation Average in the upper window and the Dow Jones Air Freight Index in the lower window. Here it is easy to see that the Air Freight sector has been weaker than the Transportation Index itself. In fact, the Air Freight Index sliced through the June low like it wasn't even there and is now back at its October 2005 levels.
Next, I have plotted a chart of the Transports verses the Dow Jones Marine Transportation Index. The Marine Index has been much weaker for a year or so now in that it was never able to better its March 2005 highs as the Transportation Average did. However, the Marine Transporters are now looking better than the overall Transportation index because they have not yet moved below their previous Secondary low point that was also recently made in June. So yes, the Marine Transporters are structurally still stronger than the overall Transportation sector.
The next sub-sector I want to look at is the Railroads. Again, I have plotted the Dow Jones Transportation Average in the upper window of the chart below and the Dow Jones Railroad Average in the lower window. Like the Air Freight Index, the Railroads are leading the way down. The Railroad Index has moved below its June secondary low and is now back to its January 2006 levels.
Lastly, I have posted a chart of the Transports verses the Dow Jones Trucking Index. Here the story is the same as with the Air Freight and the Railroad Index. The Trucking sector has moved below the June secondary low point and is now also back down to its January levels.
The bottom line is that the weakness within the Transports is pretty much across the board. There is a little more hope for the Marine sector, but even there the picture is not good. From a Dow theory perspective, the entire Transportation sector and sub-sectors are now in confirmed bear markets. Short-term, the Transports are oversold and could bounce. But, it is now very doubtful if any such bounce will be anything other than a counter-trend affair before the next leg down begins. This longer-term break down by the Transports is telling us that something is wrong within the economy and until this technical picture is mended, caution is definitely advised as the "Stock Market Barometer" continues to see stormy conditions.
In the meantime, the Secondary Trend for the Industrials still remains bullish. You may recall that I said back in January we would first see the gain and then the pain. Since May the stage has been being set for the pain. So far, the 2006 forecast that I first discussed with subscribers in late January has been pretty much right on track. My very unique Cycle Turn Indicator has allowed me to navigate each crook and turn. This indicator is key at guiding us as this setup continues to materialize and knowing the direction of the market is as simple as following this indicator. If you are interested in a statistical and technical based source that also utilizes Dow theory and provides turn points for gold, the dollar, bonds and the stock market, then Cycles News & Views may be for you. The August issue is now available and it contains all of the statistical probabilities and expectations for the stock market for the rest of 2006. Please see www.cyclesman.com/testimonials.htm.