TRANSPORTATION STOCKS LAG BEHIND INDUSTRIALS

MARKET ENDS WEEK ON A STRONG NOTE... Stocks gained more ground this past week with major indexes moving closer to overhead resistance levels.   The market is being led higher by communication and technology stocks.   As a result, the Nasdaq 100 touched a new high for the year and is leading the rest of the market higher.   One of the problems, however, remains the fact that market leadership has been relatively narrow  with several stock sectors being left behind.   Chart 1 shows the Communications SPDR (XLC) hitting a new recovery high with technology stocks not far behind.    At the same time, five sectors lost ground                                                                         which include financials, materials, healthcare, industrials, and utilities.   Last week's message showed small caps lagging behind larger stocks.   Transportation stocks are also lagging behind.

DOW THEORY OUT OF SYNC... The main premise of Dow Theory is that industrials and transportation stocks should  trend in the same direction.   And upside breakouts in one should be confirmed by the other.   That's not happening right now.   Chart 2 shows the Dow Industrials testing a falling resistance line drawn over their December and February highs and nearing a two-month high.   That's an encouraging sign.   Chart 3, however, shows the Dow Transports trading closer to their December low and trying to regain their 200-day average.   The inability of the more economically-sensitive transports to keep pace with the industrials is a potential warning that any upside breakout in the Dow might be suspect.

AIRLINES AND RAILS ARE WEAKEST GROUPS... While all of the groups in the Dow Transports are weak, the two weakest are shown below.  Chart 4 shows the Railroad Index trading near its low of the year and well below its 200-day moving average.  Chart 5 shows the Airlines Index in a similar weak condition.   Delivery service stocks were also under pressure.   Chart 6 shows United Parcel Service (UPS) plunging below its 200-day average.   The main idea behind Dow Theory is that industrial companies make the products while transportation companies move the products to market.  In a healthy environment, both should be rising together.   Right now, they're not doing that.