Back to top

Does "Dow Theory" Confirm a Strong U.S. Economy?

Read MoreHide Full Article

Have you ever heard about the Dow Jones Transportation Average (DJTA)?

It is more loosely termed the "Dow Jones Transports" by stock traders. The index is a running average of the stock prices of 20 transportation corporations.

This Dow creation is the most widely recognized gauge of the American transportation sector. Their grouping is also the oldest stock index still in use --even older than its better-known relative, the Dow Jones Industrial Average (DJIA).

Co-founder Charles Dow himself created this average, all the way back on July 3rd, 1884. As a result of the dominating presence of railroads, the Transportation Average was often referred to as the "rails" in financial discussions in the early and middle part of the 20th century.

Operating behind this Dow index, there are six tenets to his “Dow Theory” of stock index price movement.

But there is only one Dow tenet I will focus on, today, in this article.

This “Dow Theory” Tenet: Stock market averages must confirm each other.

In Dow's time, the U.S. was a growing industrial power. We had a few big population centers, but factories were scattered throughout the country. Factories had to ship their goods to market, usually by rail. Dow's first stock averages were an index of industrial (manufacturing) companies and rail companies.

To Dow, a bull market in industrials could not occur unless the railway average rallied as well, usually first. According to this logic, if manufacturers' profits are rising, it follows that they are producing more. If they produce more, then they have to ship more goods to consumers.

Hence, if an investor is looking for signs of health in manufacturers, he or she should look at the performance of the companies that ship their output to market, the railroads.

The two averages should be moving in the same direction. When the performance of the averages diverges, it is a warning that change is in the air.

Now, let’s take a deep dive into the status of Zacks Ranked Transportation industries.

Can we confirm a positive “Dow Theory” effect, where Transportation industries are hot? Are U.S. and global economies manufacturing growth indeed strong?

Yes, we can!

First off, look at Truck Transportation, a 17-company strong industry. The Zacks Industry Rank for Truck Transportation is #4 out of 265. Within that score, there are 4 new positive revisions and 4 negative revisions to report.

I duly note strong share price outperformance, too. Zacks Trucking YTD return is +4.36%, while the S&P 500 returned +2.93%. Over the last year, Trucking has returned +32.6% while the S&P 500 came down with +18.26%.

Next, let’s look into Air Freight and Cargo Transportation, a 6-company-strong industry. The Zacks Industry Rank for Air Freight and Cargo Transportation is #14 out of 265. I see 1 positive and 0 new negative revisions.

However, Air Freight’s YTD return looks weak at -4%. Over the last year, this industry returned +15%.

My guess? This share weakness is a fresh phenomenon: an “Amazon effect.”

Finally, the old Charles Dow favorite: the “rails.”

Rail Transportation is a 10-company-strong industry. Its YTD return is +1.12%, while its 12-month return is +22.48%. That annual return is a tad better than the S&P 500. So we can confirm a strong economy in the old Charles Dow manner.

In addition, Rails may be the strongest fundamental industry in Transport, right now. Why? It’s not because the Zacks Industry Rank for Rail Transportation is respectable at #64 out of 265.

Fundamental Rail earnings strength is shown here. There are 7 more positive revisions and 0 new negative revisions to report.

That’s a lopsided “rail” scorecard from its covering analysts.

Two Hot Zacks #1 Rank (STRONG BUY) Trucking Stocks —

ArcBest Corp (ARCB - Free Report) : This is a $906 million market cap stock. It carries a Long-term Zacks VGM score of A, too.

Covenant Transportation Group (CVTI - Free Report) : This is a $508 million market cap stock. It carries a long-term Zacks VGM score of A, too.

In-Depth Zacks Research for the Tickers Above

Normally $25 each - click below to receive one report FREE:

Covenant Transportation Group, Inc. (CVTI) - free report >>

ArcBest Corporation (ARCB) - free report >>

More from Zacks Zacks Industry Rank Analysis

You May Like