TRANSPORTS AND UTILITIES STILL IN DOWNTRENDS AND MAY BE PREVENTING UPSIDE BREAKOUT IN THE DOW -- DOW JONES COMPOSITE AVERAGE STILL IN A DOWNTREND AS WELL -- THAT'S A CAUTION SIGN FOR THE DOW
TRANSPORTS AND UTILITIES ARE 2015 LAGGARDS... Chart 1 shows the divergence by the Dow Industrials (which are close to a new record) and the Dow Transports and Utilities which are both in downtrends. Since the start of the year, the industrials have gained 1.6%, while the transports and utilities have lost -8% and-9% respectively. That divergence between the three Dow Averages is unusual and may continue to weight on the industrials. In a normal healthy uptrend, all three Dow Averages are usually rising together. Right now, they're not doing that.
Chart 1
DOW INDUSTRIALS PULLING BACK... The daily bars in Chart 1 show the Dow Industrials selling off today and in danger of falling back below its 50-day average. On Monday, it came within 2% of its May high. The other two Dow Averages have been doing much worse. Chart 3 shows the Dow Utilities having fallen to the lowest level in eight months. The UTIL is down nearly -15% since the end of January. Not only is it trading well below its (red) 200-average, but its (blue) 50-day average has fallen below its 200-day line (the death cross). The plunge in utility stocks is the direct result of the surge in bond yields since the start of the year (dashed line), and a sign that rising bond yields are starting to have negative impact on dividend-paying stocks which also include REITs.
(click to view a live version of this chart)
Chart 2
(click to view a live version of this chart)
Chart 3
DOW TRANSPORTS ARE ALSO IN A DOWNTREND... The Dow Transports are having an especially bad day. Chart 4 shows the Dow Transports also in a downtrend as measured by moving average trends. It's trading below its 50- and 200-day moving averages, and its 50-day line is well below its 200-day line (another death cross). The Transports have lost -9% since the start of the year. According to the century-old Dow Theory, a stock market uptrend exists when the Dow Industrials and Transports are hitting new highs together. I've heard many ideas over the past month as to why the drop in the transports is nothing to worry about. One explanation is that falling oil prices enabled the transports to outperform the industrials last year (23% to 7%), and that this year's transportation weakness is just bringing its relationship to industrials back to normal. There may be some truth in that. But I'll feel more confident when the Dow Transports start showing some signs of turning up. In fact, a 2% drop in the transports today is leading the rest of the market lower. The group is being led down by truckers (-2.3%) and rails (2.2%). Air freight and airlines are also in the red. Today's drop puts the TRAN 10% from its top which is official correction territory.
(click to view a live version of this chart)
Chart 4
DOW JONES COMPOSITE AVERAGE STILL BELOW 200-DAY AVERAGE... I've explained in previous messages that the best way to combine the trend of all three Dow Averages is by tracking the Dow Jones Composite Average ($DJA). The DJA includes all 30 Dow Industrials, 20 Transports, and 15 Utilities. And it still looks weak. Chart 5 shows the DJA peaking last December and forming a pattern of "lower peaks and troughs" since then. It fell below its (red) 200-day moving average earlier in June, and met resistance there over the last week. Obviously, the DJA is being weighed down by the transports and utilities. Here's the problem. Over the last ten years, the DJA has a 90% correlation to the Dow Industrials (using a 50-week time span). That being the case, I continue to worry about its current downtrend. It also makes me wonder if the Dow Industrials can hit a new record, and stay there, until the Dow Composite Average starts to show some strength. A good start would be for the DJA to climb back over its moving average lines. So far, it hasn't been able to do that.
(click to view a live version of this chart)
Chart 5
AIRLINES GET A BARRONS BOUNCE ... Airline stocks got a bounce this week from a front-page article in BARRONS which called for the group to rise from 15% to 50% over the next year ("Climb Aboard Now"). Unfortunately, that wasn't enough to pull the group out of its downtrend. Chart 6 shows the Dow Jones US Airlines Index still trading well below its 200-day moving average. It would have to climb back above that red line and its early June peak at 232 to signal some improvement. Airlines as a group are down -14% this year, just slightly better than a -15% drop in the rails. [Truckers lost 10%, and airfreight -6%]. BARRONS' top pick was American Airlines (AAL). Chart 7 shows AAL still in a downtrend with no convincing signs of a bottom. AAL would have to exceed its moving average lines (and major resistance along 46) to turn its trend higher. Charts 8 through 10 show the other three top U.S. carriers also trading below their 200-day lines (Delta is backing off that resistance line today). BARRONS may be right about airlines being a bargain at current low levels. But I'd wait for more convincing signs of an upturn being "climbing aboard".
(click to view a live version of this chart)
Chart 6
(click to view a live version of this chart)
Chart 7
(click to view a live version of this chart)
Chart 8
(click to view a live version of this chart)
Chart 9
