Is Divergence Between Dow Transports And Dow Industrials Something To Worry About?

According to Dow Theory the transportation index leads the Dow Jones Industrial Average higher and lower. A divergence between a climbing Dow Industrial Average and a falling Down Jones Transportation Average (DJTA) is an indicator of trouble to come.

And that divergence is exactly what we’re seeing right now.

The Dow Jones Industrial Average is setting record high after record high. But the Dow Jones Transportation Average peaked for 2019 so far on April 24 at 11099. And that high was still below the record high set back on September 14, 2018 at 11578.

The Dow Jones Transportation Average is at 10472.07 at 2:30 p.m. New York time on Wednesday, July 17. That’s down another 2.99% on the day.

The economics of the Dow Theory make sense, The transportation sector is a leading economic indicator because revenue and earnings at transportation stocks are very sensitive to shifts in the economic trend. Trucking companies see a decline in their business before industrial companies report a drop in sales, for example. Revenue at airlines is very sensitive to shifts in discretionary consumer travel.

Earnings reports from transportation companies that are now coming in for the second quarter–and some of the guidance for the rest of the year–are showing signs of weakness. Railroad CSXWealth Strength IndexCSX is Extremely Flat and trending Down (CSXWealth Strength IndexCSX is Extremely Flat and trending Down) just reported disappointing earnings and guidance. Trucker Knight-Swift (KNX) warned on second and third quarter earnings. On the other hand, trucker J.B. Hunt Transport (JBHT) reported better than expected second quarter results yesterday and said that it expects intermodal cargo volume will reverse the first half slide in truckload volume in the second half of 2019.

Airline earnings, too, have been strong with Delta (DAL) and United Airlines (UAL) both beating Wall Street consensus and with American Airlines (AALWealth Strength IndexAAL is Moderately Flat and trending Down) raising guidance last week.

That could mean that the weakness in the Transportation Average is warning of problems in the industrial sectors of the economy while the results from airlines are signaling continued consumer strength.