MW This century-old stock-market indicator suggests selloff is far from over
By Joseph Adinolfi
The Dow Theory has sent markets a powerful sell signal. This is why investors should listen.
A stock-market indicator with more than a century of history is flashing a warning for investors, suggesting the selloff that began earlier this month may deepen.
The Dow Jones Transportation Average DJT has failed to rise to a notable new high following the recent record reached by the Dow Jones Industrial Average DJIA on March 28.
That could spell trouble for the broader market according to the principles of the Dow Theory, one of the original tools for technical analysis developed by Dow Jones & Co. co-founder Charles Dow more than a century ago.
Stocks have endured a rough patch since the beginning of April following a powerful five-month rally that carried the S&P 500 SPX, Nasdaq Composite COMP and Dow industrials to record highs.
What is the Dow Theory and why should investors care?
The Dow Theory is more than just a technical indicator - that is, solely based on price movements alone.
Rather, as MarketWatch's Tomi Kilgore explained, it is rooted in the notion that industrial companies and transportation firms have a symbiotic relationship that can provide clues about the future direction of the market.
The core of Dow Theory is that a notable high - either a record high, or a 52-week high - in either the industrials or the transports gauge must be confirmed by its sibling in relatively short order. If it isn't, it could be a sign of trouble brewing in the economy, or at least in the stock market.
The transports gauge closed at its lowest level in five months on Wednesday after an earnings miss sent shares of trucking company J.B. Hunt Transport Services Inc. $(JBHT)$ more than 8% lower. This latest bout of weakness followed a break below the gauge's 200-day moving average on Friday, according to FactSet data.
To be fair, the Dow industrials haven't performed so hot lately, either. The blue-chip average is down more than 5% from its record close on March 28.
But as much as the Dow has struggled in April, the transports are doing worse. The gauge hasn't seen a record close since Nov. 3, 2021. It hasn't even taken out its 52-week high, which stands at 16,695.32 and was reached on July 28, FactSet data show. Doing so would require a rise of nearly 10% from its current level.
Signal suggests selloff has more room to run
Market strategists believe this Dow Theory signal suggests the current selloff isn't over yet.
"Charles Dow, namesake of the DJIA, would have identified such a divergence as a harbinger of a downshift in the economy's torrid pace, or at minimum, as we believe, a sign that the current market correction has further to run," Julian Emanuel, a senior managing director at Evercore ISI, said in a report shared with MarketWatch on Thursday.
Adam Turnquist, chief technical strategist at LPL Financial, told MarketWatch in a phone interview Thursday that he has been keeping a close eye on Dow Transports lately.
According to Turnquist, the theory has remained a helpful indicator, although the character of both the industrials and transports gauges has changed dramatically since Dow first developed it.
"Historically, when you see the two indexes breaking out to new 52-week highs, that has been a good signal," Turnquist said.
That's not to say there haven't been some misfires along the way. In late July, the transports confirmed a 52-week high for the Dow just as the market was entering a three-month-long selloff.
Despite this, Turnquist believes the recent weakness in Dow transports -coupled with other indicators measuring internals like the share of stocks rising vs. falling - likely signals that the stock-market pullback that began in April likely has more room to run.
However, he expects the market's decline will ultimately be limited because of the still-strong U.S. economy.
"It's hard to factor in a really big correction when you have an economy that remains this resilient, even though the backdrop of higher rates remains," Turnquist added.
Both the Dow industrials and the transports were clinging to modest gains in midday trading on Thursday, with the industrials up 17 points, or less than 0.1%, at 37,769, and the transports up 26 points, or 0.2%, at 15,012.
Meanwhile, the S&P 500 SPX and Nasdaq Composite COMP had surrendered early gains, on track to close lower after opening higher for the fourth session in a row. If this happens, it would be the first such streak in six years.
-Joseph Adinolfi
This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
April 18, 2024 13:46 ET (17:46 GMT)
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