Daily Gains Letter

Why the Dow Theory Indicator Needs to Confirm This Stock Market

By for Daily Gains Letter |


The Dow Jones Transportation Average continues to be one of the most important stock market sub-indices to follow.

The Dow Jones Transportation Average is an old economy gauge, one that is part of Dow theory, and its movements are meaningful in that component companies are the backbone of the U.S. economy, just like the Dow Jones Industrials.

J.B. Hunt Transport Services, Inc. (NASDAQ/JBHT) is an important benchmark stock on the Dow Jones Transportation Average. The company just reported solid revenue growth, with good earnings that just missed consensus.

According to the company, its revenues for the first quarter of 2013 were $1.3 billion, a gain of about 10.7%. Earnings were $73.3 million, or $0.61 per diluted share, compared to $67.7 million, or $0.57 per diluted share, for the first quarter of 2012.

On the stock market, J.B. Hunt has been on a tear. The stock is up almost 50% since last September and is definitely due for a break.

Also needing a break on the stock market is Alaska Air Group, Inc. (NYSE/ALK). This position has been soaring and the kicker is that it’s not even expensively priced with a price-to-earnings (P/E) multiple of just under 14.

Union Pacific Corporation (NYSE/UNP) is a Dow Jones Transportation stock that is a very important benchmark stock for the U.S. economy and industry. Its earnings are due on Thursday. Union Pacific’s stock chart is featured below:

Chart courtesy of www.StockCharts.com

A number of companies that are components of the Dow Jones Transportation Average are due for a major break in their share prices. Although it’s very early days, earnings results for the first quarter so far are showing revenue growth, with earnings struggling to meet consensus. While I think the index can still move higher this year, it’s way too early in the earnings season to draw any conclusions.

There is a lot of anticipation in the stock market—it’s gone up a lot before even getting into corporate financial results. Wall Street and investor consensus is that this market is very much in need of a correction.

But with this in mind, the Dow Jones Transportation Average remains the key index, in my view, in terms of where the rest of the stock market is headed. Keep this important index on your radar. The old economy matters nowadays.

Since the beginning of the year, the Dow Jones Transportation Average has outperformed the Dow Jones Industrials by about two percent. The difference between the two indices was quite pronounced in early March.

Longer term, the two stock market indices basically mirror each other, but according to the charts I looked at, the performance of the Dow Jones Industrials is less volatile.

Earnings results are about to be unleashed, and the stock market will now be looking for confirmation—that is, confirmation it hasn’t made a huge mistake.

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