Dow Theory Update…

dji

The Dow Jones Industrial Average has remained range bound since Thanksgiving and it currently trades near the top of this trading range. However in the middle of all of this there are some divergences that are worth noting. As both of the other components that make up the Dow Theory (Transports and Utilities) trade near the bottom of their respective trading ranges.

djt

Here is a chart of the Dow Jones Transportation Average Total return. It trades at the bottom of it’s recent range, some 8% off it’s bull market highs. These lows have held on five separate occasions, if support is once again found then this would be the sixth.

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The Dow Jones Utility average is also near the lows of it’s range, some 12% below it’s bull market highs made in January. Utilities had been relatively overvalued to other sectors of the market due in part to increased demand from those seeking higher yields than investment grade bonds and savings accounts offer. Now with the increased possibility of interest rate increases some time on the horizon, this has made the Utilities sector less attractive on a near term basis.

On a side note, if you happen to be one of those who are searching for higher yields, please keep in mind that these increased yields come with higher risks. As a bear market in stocks is a lot different than a bear market in bonds. Make sure you take the time to know what you own and understand the potential “worst case scenarios” before jumping in. There are many other components to consider apart from the interest or dividend payments an investment pays out to you.

ltIt will be interesting to see how these divergences play out as two of the three Dow components trade near the lower end of their respective ranges. The last time we saw one component (Transports) diverge or lag behind was in the year 2012. As the Industrial Average and Utilities made new bull market highs, the Transports remained stuck the entire year. Turns out the other 2/3rd’s were able to drag the transports higher in 2013, which happened to be a great year for investors.

So the question remains, will the lagging 2/3rd’s be enough to drag the Industrial Average down with it? If I had to venture an educated guess, I would say no. The market internals remain strong, rates remain historically low and although rates are supposedly set to rise soon, we are still possibly years away from a point where short term rates could be high enough to invert the yield curve. But it will be interesting to see how it all plays out.

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