This week it’s the fact that the Dow Transports are setting multi-week lows while the Dow Industrials flirt with an all-time record breakout. Maybe this “non-confirmation” will matter. Hasn’t mattered about a hundred times before as this sort of divergence has resolved itself to the upside – crisis averted. But this time, maybe. Once upon a time, it was a major sign of a top – at the peak of the dot com boom, the trannies were getting crushed and never confirmed. In hindsight, “that was the tell! Classic!”
And then like every single time afterward it simply didn’t matter at all.
But it’s an indicator. And a particularly facile one at that. My daughter could be trained to pick it out on an iPad between 3rd grade dismissal and dance class. My favorite thing about Dow Theory, that new highs for the industrials should be confirmed by new highs for the transport stocks that actually ship the goods industrial companies make, is that there are three well-known newsletters focused on it and they almost never agree with each other.
Also, never mind the fact that railroad market caps were once almost the entirety of the stock market. Or that lots of what they ship is destined for overseas (Powder River Basin coal, anyone?). Never mind the fact that our economy has never before been more focused on services and online activity – which doesn’t necessitate a ton of shipping activity outside of ecommerce. In the 1790’s, there was a boom in canal stocks – we moved goods by barge before railroads were invented and by horse-drawn cart before that. Is anyone still counting Procter & Gamble shipments loaded onto the Ohio River barges of Cincinnati to gauge how the economy is doing? That’s another topic for another day.
So what do we do with this supposed Dow Theory failure?
The key is to go on record making a fuss over it. If it turns out to be meaningless, like the small cap / large cap divergence of last year, for instance, no one will be mad. But if it turns out to have mattered, or even triggered, the next correction, you can point to your published “concerns” over this particular divergence forever.
That’s how the game is played. Blog your f***ing head off.