By Chuck Mikolajczak
NEW YORK (Reuters) – As the Dow Jones Industrial Average and S&P push to new records on Monday, the Dow Jones Transportation Average has continued to lag, raising some concerns among investors that any gains in the broader market could be short lived.
According to Dow Theory, a means of technical Wall Street analysis that includes some aspects of sector rotation, when a major average such as the industrials <.DJI> reaches a new high, that advance should be confirmed with a similar advance in the transportation index.
“Either the transports are going to turn around and start moving higher or the Dow is going to turn around and start moving lower,” said Ken Polcari, director of the NYSE floor division at O’Neil Securities in New York. “Sooner or later something has to give.”
The industrials have advanced nearly 3 percent for the year while the benchmark S&P 500 <.SPX> is up more than 3 percent. However, the transports <.DJT> have not followed suit, and have, in fact, gone south with a decline of almost 5 percent.
Last week, as the Dow was nearing its latest peak, the transports fell 1 percent, dragged by a 6.7 percent drop in Kansas City Southern <KSU.N> after the rail operator withdrew its outlook and cut its capital expenditure for 2015.
On Monday, transports edged up 0.2 percent, slightly outpacing a 0.05-percent gain in industrials.
“One of the most glaring divergences has been the underperformance of the transportations average,” said Frank Cappelleri, technical market analyst and trader at Instinet LLC in New York.
“A lot of people are looking at this, that support is very clear,” referring to the 8,600 support level the transports have been able to hold since moving above it in late October. If broken convincingly, a support level could lead to steep losses as buyers no longer move in.
Still, even if the transports fail to rebound, the industrials and S&P 500 may be able to move higher.
Katie Stockton, chief technical strategist at BTIG in New York, is bullish in the near term on stocks and notes that Dow Theory does not apply to existing trends. The theory would apply if industrials and transports were to be changing directions, rather than keeping with the same pattern.
“In reality, the Dow Theory doesn’t call for it in this kind of scenario, so it’s really a misperception, or a bad interpretation of Dow Theory,” said Stockton in an interview with Reuters.
“So it would matter if the Dow industrials were in a down trend and were breaking out and trying to reverse that down trend, then you would want to see that confirmation from the transports.”
(Editing by Bernadette Baum)