Dynamic Hedge blogs about correlation, relative value and quantitative analysis at http://www.dynamichedge.com
I wrote about the possible divergence occurring between the S&P 500 Index and the Dow Jones Transportation Index last week. Yesterday the divergence in the charts resolved itself when the Transportation Index made a new 52-week high.
This doesn’t invalidate the use of the Transportation Index as an indicator, it just means, “on to the next one.” The market keeps rolling, and you’ve got to keep rolling along with it. Just because it didn’t give the signal you wanted doesn’t mean there there isn’t a signal. Strength in transports means that continued market strength is more probable than weakness.
Transportation troubles (Abnormal Returns)
Dow Jones Transportation Index: Early Warning System (Dynamic Hedge)