The Dow Jones Industrial Average (DJIA) has been a bit of a disappointment for widow investors this year, based on my stock market analysis. The blue-chip index, a perceived barometer of how America is doing according to the Dow theory, fell back below 18,000 last Thursday. Moreover, it is up a mere 0.8% this year.
Now some investors in the old school camp would say the DJIA should fall even more based on the deterioration of the Dow Jones Transportation Index.
I say: what are they talking about? Have they recently taken a look at the transport index? The predecessor to this index was initially developed as the Dow Jones Railroad Index way back in 1884, when no one walking the earth now was even around.
The theory goes that you can use the direction of the transportation index to predict the industrial index. A downward move in transports implies a similarly directional move in the industrials, and vice versa.
Why My Stock Market Analysis Says the Transport-Industrial Relationship is Flawed
Here’s the thing; while it’s valid to say the direction of the transport index can foreshadow how well or poorly the overall economy is doing, it’s a whole different story regarding its impact on the industrial index.
Think about it this way: Transports include rail, air, and trucking. More business means more shipping using these modes of transportation.
But if you look at the companies comprising the industrial index, you’d see that many of them actually do not ship as many goods as you would expect.
For instance, when you buy an “iPhone,” you can pick it up at the Apple Inc. (NASDAQ/AAPL) store or at a mobile outlet such as Verizon Communications Inc. (NYSE/VZ), AT&T, Inc (NYSE/T), Sprint Corporation (NYSE/S), or T-Mobile US, Inc. (NYSE/TMUS), or at your local Best Buy Co., Inc. (NYSE/BBY). There is no need to have the phone shipped.
And The Walt Disney Company (NYSE/DIS) really doesn’t need to rely heavily on transportation to ship anything. The same goes for The Goldman Sachs Group, Inc. (NYSE/GS), McDonald’s Corp. (NYSE/MCD), or Visa Inc. (NYSE/V), to name a few on the index.
It’s different from years ago when many of the industrials would use some form of transport to ship their goods to customers, hence the old-but-outdated relationship.
Dow Theory: Totally Outdated?
Moving forward, the DJIA is still a pretty good barometer of corporate health across America. In fact, it’s also an indicator of the global economy due to the many multinationals in the index. But trying to predict where it’s heading based on the Dow Transports is passé. If you really want to know where the DJIA may be heading, just look at the economy, both physical and virtual.