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Transport Index a Dark Harbinger?

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Don’t try telling anyone who owns a transportation stock that we’re still in a bull market.

Despite a sharp rebound Wednesday for the Dow Jones industrials, the Dow transportation stock index slid 51.77 points, or 1.8%, to 2,808.44--its lowest since last October.

For investors who believe in the “Dow Theory,” the continuing plunge in the transports index is a bad sign. The theory holds that a bull market is in trouble if the Dow transports are moving counter to the Dow industrials.

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In this case, the transports are already deep into their own bear market: The Dow transports index is down 26% from its May peak.

The theory harks back to the days when transportation stocks were considered early indicators of economic trends. A sustained fall in business shipments, for example, was for much of this century considered a harbinger of possible economic recession.

But is the Dow Theory still valid in the “new age” economy? This year, despite a strong economy overall, the transportation industry has been hit hard by rising fuel costs. And Wednesday, several airlines reported weak earnings that partly reflected canceled flights because of Hurricane Floyd.

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The big drop in the 20-stock Dow transports index Wednesday was tied to trucking and air freight firm CNF Transportation, which slid $4.94 to $30.50 as investors fretted over a CNF pricing dispute with the U.S. Postal Service.

Richard Russell, veteran editor of Dow Theory market letter in La Jolla, says market bulls always try to pooh-pooh the theory when the Dow transports are signaling trouble while the industrials are still strong.

But according to Russell, history says you can’t sustain a bull market without the transports participating.

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Tumbling Transports

Despite the rally in the Dow Jones industrial average Wednesday,

the Dow transportation index plunged 1.8% to its lowest level in nearly a year. Quarterly closes and latest:

Wednesday: 2,808.44

Source: Bloomberg News

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