Market Commentary: Will The Dow Go Off The Rails?

by True Wealth Advisors

Apparently FedEx and UPS were engaged in merger discussions. The new firm would have been called

“FedUP”. This would have been the biggest fail in the naming of a merged firm since the proposed merger between the two computer giants General Data and Digital. The new firm might have been called…well, you figure it out…

What FedEx and UPS have in common is both are components of the Dow Jones Transportation Average, which itself has been a source of concern to market observers. According to Dow Theory—and any market theory that has been around as long as this one has should be at least listened to—when the Dow Jones Industrial makes a new high, confirmation of the uptrend must be confirmed by a new high in the transportation average.

The last high water mark for the transports occurred in December, after which the industrials made two highs, one in March and another in in May. In theory, the two indices should be influenced by the same forces, those pertaining to the levels of economic output. Goods that are produced need to be transported.

The transportation index as of this writing is down about 9% for 2015, while the Industrial Average is still hovering at or near new highs. This might be expected to occur if one index is conforming to economic realities and the other less so, that is, one index is overvalued. Many expect the Industrial index to adjust downward as the transports are doing now. See chart at top of page 2.

Over the last two years the Dow Jones Transportation Index has risen about 39%, about double that of the Dow Jones Industrial Index’s 21%..

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