Oct 4, 2012

The predicting power of transportation sector (DJIA vs DJT)

The transportation sector has been widely used as leading indicator for the current economic activity. Last few trading sessions of Dow Jones Transportation Index (DJT) and Dow Jones Industrial average (DJIA) give interesting signs.

The fact that DJTransportation sector leads DJIA could be used to predict the market ups and downs. As chart shows they are strongly correlated, however there is an interesting relation to be examined – the divergence between both.

Two times over last two years divergence between transports and Dow industrials has been detected. Every time mentioned pattern appeared the market continued its rally despite Transportation companies drop. If you follow the traditional conception you should consider that divergence as a signal for weak economic activity and should underweight the industrials holdings. However, as chart shows, the divergence periods have been followed by robust rallies (and then sharp declines). This pattern was repeated in January 2011, in February 2012. Last week’s drop of more than 5% for Dow Jones Transportation Index vs. flat performance for Dow there is high probably we are witnessing the same pattern again.

Dow Jones vs. DJ Transportation - divergence
Dow Jones vs. DJ Transportation - divergence
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