‘Dow Theory’ Potentially at Play in 2018

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“Keep an eye on the transports.” It’s one of the oldest adages of market watchers.

The theory is the railroads, truckers and airlines are forward-looking indicators on the economy and broader market. Increased shipments and travel signal improving business conditions. Slowdowns, on the other hand, may warn that the opposite is happening. Charles Dow, founder of the Wall Street Journal, first noted this relationship more than 100 years ago.

That got the data team here at TradeStation curious when the Dow Jones Transportation Index ($DJT) broke out to a new high late last month. How reliable of a signal is this sector after all?

Pretty reliable, it seems. Our systems show that DJT made new highs in fourth quarter eight times in the last 20 years. Each time it happened, the S&P 500 proceeded to advance in the following 12 months. The average gain was 11 percent. Sure that might not be a huge return, but there are plenty of ways to juice up moves like that with options and futures.

 

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David Russell is VP of Content Strategy at TradeStation. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.