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

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.