Dow Jones Transportation Index Still Diverging From Broader Market; What It Means

By Thursday, August 30, 2012

Dow Jones Transportation Index Still DivergingTrading volume on the stock market is lethargic, even for the traditionally slow summertime period. All eyes will be on Ben Bernanke this Friday, and the main stock market indices won’t move much until then. (See “Broader Market to Consolidate—No More Upside Without the Fed.”)

The significant divergence that has built up between the S&P 500 Index and the Dow Jones Transportation Index remains, and to me, it represents non-confirmation of the stock market’s most recent rally. Naturally, the divergence is most pronounced between the NASDAQ and the Dow Jones Transportation Index, followed by the S&P 500 Index and the Dow Jones Industrials. It became apparent mid-July, when oil prices recovered from their recent correction. But I think the divergence is due to more than just higher oil prices; I think it’s emblematic of a stock market that’s losing its momentum.

Already this year, the Dow Jones Industrials, the S&P 500 Index, and the NASDAQ Composite are up substantially, and this doesn’t include dividends. Average trading volume for the Dow Jones Industrial Average has been declining over the last several years; the performance of this index has repeated itself three times since its low in March of 2009. I get a real sense among stock market investors that things are coming to a head on the economy, Wall Street, and the political landscape. It’s a very tough environment in which to make predictions about the stock market. There are just too many unknowns out there, and that’s why so many dividend paying stocks, like those in the Dow Jones Industrials, have done well this year. All the uncertainty has made stock market investors very conservative.

The technical picture is slowly eroding, as far as I’m concerned. Yet there remains optimism in the stock market that began when eurozone central bankers said they would do more to protect the euro currency. News on the sovereign debt crisis in Europe has been surprisingly absent lately. The problem is still there, but the stock market is more concerned with Ben Bernanke.

All eventualities for the U.S. economy and the stock market are possible going into 2013. The Federal Reserve continues to flood the U.S. monetary system with cash, and interest rates are artificially low. Economic news regarding the U.S. housing market is showing improvement, but overall employment is not. Corporate balance sheets are very solid at this time, and stock market valuations are reasonable. Near-term risks include the fiscal cliff in the U.S., the sovereign debt crisis in the eurozone, and geopolitical uncertainty regarding Syria and Iran. Financially, U.S. corporations have never been better. Government bailouts created a recovery on Wall Street, but the Main Street recovery is a lot slower.

With the S&P 500 Index over 1,400 and the Dow Jones Industrials over 13,000, the stock market fairly reflects the current earnings outlook. The divergence between the Dow Jones Industrials and the Dow Jones Transportation Index is worrisome, and for the broader market to really advance, transportation stocks will have to accelerate.

About the Author | Browse Mitchell Clark's Articles

Mitchell Clark is a senior editor at Lombardi Financial, specializing in large- and micro-cap stocks. He’s the editor of a variety of popular Lombardi Financial newsletters, including Micro-Cap Reporter, Income for Life, Biotech Breakthrough Stock Report, and 100% Letter. Mitchell has been with Lombardi Financial for 17 years. He won the Jack Madden Prize in economic history and is a long-time student of equity markets. Prior to joining Lombardi, Mitchell was a stockbroker for a large investment bank. In the... Read Full Bio »

Sep. 2, 2015
Trailing 12-month EPS for Dow Jones companies (Most Recent Quarter) $1014.15
Trailing 12-month Price/earnings multiple (Most Recent Quarter)


Dow Jones Industrial Average Dividend Yield 2.71%
10-year U.S. Treasury Yield 2.14%

Immediate term outlook:
The bear market rally in stocks that started in March 2009, extended because of unprecedented central bank money printing, is coming to an end. Gold bullion is up $1,000 an ounce since we first recommended it in 2002 and we are still bullish on the physical metal.

Short-to-medium term outlook:
World economies are entering their slowest growth period since 2009. The Chinese economy grew last year at its slowest pace in 24 years. Japan is in recession. The eurozone is in depression. With almost half the S&P 500 companies deriving revenue outside the U.S., slower world economic growth will negatively impact revenue and earnings growth of American companies. Domestically, America’s gross domestic product grew by only a meager 2.3% in the second quarter, which will negatively impact an already overpriced equity market.


Will slowdown in China affect the U.S. economy?

View Results

Loading ... Loading ...
From: Michael Lombardi, MBA
Subject: Golden Opportunity for Stock Market Investors

Read this message