Dow Theory confirms a strong U.S. economy

May 24, 2018 08:00 AM

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. 

Charles Dow himself created this average on July 3, 1884. 

A basic tenet of “Dow Theory” is that stock market averages must confirm each other. Investopedia defines Dow Theory this way: The market is in an upward trend if [either the] industrial or transportation average advances above an important high and is followed by a similar advance in the other average. 

In Charles Dow’s time, the United States was a growing industrial power. The country 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. Hence, if an investor is looking for signs of health in manufacturers, he should look at the performance of the companies that ship their output to market, the railroads. 

Given that, 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. First off, look at Truck Transportation, a 17-company strong industry. The Zacks Industry Rank for Truck Transportation is #4 out of 265. 

The year-to-date return of Zacks Trucking sector is 4.36%, while the S&P 500 returned 2.93%. During the last year, Trucking has returned 32.6%, while the S&P500 returned 18.26%. 

Next, let’s look into Air Freight and Cargo Transportation, a six-company strong industry. The Zacks Industry Rank for Air Freight and Cargo Transportation is #14 out of 265.

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

This share weakness is likely due to the Amazon effect.

Finally, the old Charles Dow favorite: trains. Rail Transportation is a 10-company strong industry. Its year-to-date 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 based on Charles Dow’s metric. Two Zack “strong buy” stocks in the sector are Covenant Transportation Group (CVTI) and Saia Corporation (SAIA).  

About the Author

John Blank, Zacks Investment Research