This Stock Market Index Is Screaming Sell!

By Friday, September 28, 2012

Stock Market Index Is Screaming SellOne of stock market’s leaders over the past few years has been Union Pacific Corporation (NYSE/UNP). I always follow this market leader, which has been a tremendous wealth-creator in recent history. Railroad stocks recently took it on the chin after Norfolk Southern Corporation (NYSE/NSC) announced that its third-quarter earnings would be below consensus due to a decrease in coal shipments. The entire railroad group sold off on the stock market, including Union Pacific, which is a key component of the Dow Jones Transportation Average.

Transportation stocks are important to the stock market’s overall trend, and “confirmation” from the index is a key part of Dow theory. But transportation stocks only do well when the Main Street economy is doing well, and the Dow Jones Transportation Average has been flat all year. So it figures that the Dow Jones Transportation Average isn’t going up along with the rest of the stock market, because the economy isn’t growing; and there lies the truth about the current state of things. The stock market is going up, but transportation stocks are not. According to history, this divergence can’t last very long, and it makes the stock market look very vulnerable to a major correction.

The Dow Jones Industrials, the S&P 500 Index, and the NASDAQ Composite all have had solid gains so far this year. But many component companies within the Dow Jones Transportation Average have not; in fact a lot of these stocks have been going down for some time now.

United Parcel Service, Inc. (NYSE/UPS) is another major component of the Dow Jones Transportation Average, and this stock has been trending lower since March. The company’s recent stock chart is featured below:

 United Parcel Service Chart

Chart courtesy of www.StockCharts.com

J.B. Hunt Transportation Services, Inc. (NASDAQ/JBHT) has been a major wealth-creator since 2003, and this component company of the Dow Jones Transportation Average recently turned negative, right at the time when the rest of the stock market was accelerating on expectations for a third round of quantitative easing (QE3). Here is a recent stock chart for J.B. Hunt:

J.B.Hunt Transport Chart

Chart courtesy of www.StockCharts.com

To me, this divergence among transportation stocks is a major problem. Even though I don’t think the stock market is overvalued, it is definitely ahead of the current economic reality. (See “Stock Market: Will it Heed The Warnings?”) Second-quarter gross domestic product (GDP) in the U.S. came in at 1.3%, well below consensus of 1.7%. Orders for durable goods tumbled in August.

The stock market went up this summer on the hope of QE3 and more monetary stimulus in China. Trading on hope works for a little while, but the economic data is showing something else; the Dow Jones Transportation Average currently reveals a major sell signal for the rest of the stock market. The proof will be in the upcoming earnings releases of component companies that make up the index. Even in the face of lower oil prices, the Dow Jones Transportation Average is trending lower. I believe this is the most important piece of evidence supporting a major stock market correction in the near future.

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 »