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The Most Important (Technical) Chart in the World

The Most Important (Technical) Chart in the World

September 10, 2021
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Fun Fact Friday: The Dow Jones Transportation Average is actually the oldest US stock market index in existence, even older than the more-popular Dow Jones Industrial Average. Charles Dow developed the index, originally called the Dow Jones Railroad Average, all the way back in 1884 and it was originally comprised of just nine railroad stocks and two non-rail companies.

Now certainly stock indexes and the Dow Transports have evolved significantly in the past 130 years, and you might be questioning the relevance of transportation stocks in a world where information moves at the speed of light and commerce increasingly happens online. We’ll concede that the performance of industries such as semiconductors or even old-school financials might be better tells for Dow’s “confirmation theory” these days, where one looks for new highs in another index or average to “confirm” a high in the primary one. However, we think that the Dow Jones Transportation Average might be one of the most important charts in the world right now, and might offer key insight to the next major move in the broad market.

As shown in the LPL Financial Chart of the Day, the Transports have coiled into just a 6% range for the past 3 months, but held above their rising 200-day moving average. The consolidation comes after a historical 15-week winning streak that ended in early May. We believe the recent pause was well overdue and isn’t necessarily indicative of underlying weakness in the stocks or the economy.

View enlarged chart.

“Our belief is that the transports are most likely to resolve higher in the direction of the underlying trend” said LPL Financial Chief Market Strategist Ryan Detrick. “However, whichever way the average break out of this range is likely to be in conjunction with the broader indexes and we know that September can be a rocky time of year.”

The specific levels we are watching on the Transportation Average are the July highs at 15,081 and recent lows just above 14,000. If we were to break lower, we don’t think this would set the market up for a significant fall, just a sign that the 2021 run of no 5% pullbacks in the S&P 500 is more likely to end. However, we continue to favor stocks over bonds and would likely use any equity weakness in the near-term opportunistically.

 

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