With six of the nine S&P Sectors trading below key support, it’s easy to be concerned about the near term prospects for the markets. The upcoming election as well as an impending rise of interest rates has wreaked havoc on investor’s confidence as money continues to flow out of U.S. Equity markets and into Bond funds (Per Lipper U.S. Fund Flows).
Despite the broader market’s malaise, there is one leading indicator that is holding up surprisingly well. It’s the Dow Jones Transportation Index (see below) which has regained its uptrend today following upbeat earnings from several trucking companies. Major airlines are coming in above estimates as well while air-freight heavyweight Fedex (FDX) surprised to the upside last month.
As many of you may know, the use of the Dow Transportation Index as a leading indicator is a core belief of the Dow Theory. As developed by Charles Dow, the theory states that improvement in transportation stocks points to strength in manufacturing - as increased demand for goods causes an increase in the need to transport those goods.
And while this theory was first developed when the U.S. was a more industrial nation, the concept still holds weight. Despite advances in technology, the movement of goods still takes place by trucks, rail and air.
There actually have been signs of strength in the manufacturing sector as earlier this month reported data showed a jump in new orders as well as production in September.
The broader markets still have work to do before most investors turn bullish again however, the potentially positive move into the Dow Transports is certainly worth noting.
Mary Ellen McGonagle
MEM Investment Research
www.MEMinvestmentResearch.com
