Digging into the Dow Averages

Monday March 23, 2015 | Frank A. Barbera

It is becoming increasingly clear that not all is well with the Dow Jones Averages. While the Industrial average continues to push to higher highs, we do see noteworthy deterioration taking place within two other Dow indices; specifically the Dow Transports and Dow Utilities.

As the Dow Industrials meticulously approached its previous high of 18,244.35, as seen on February 25, 2015 (point 4), we also observed that the Dow Transports failed to make a matching, or even new, high. This is the fifth such failure dating back to November of 2014 on behalf of the Transportation Average. What’s more, only 5 of the 20 components have managed to make new 52 week highs in all of 2015.

Source: TradeStation, August 2014 through March 23, 2015

Most of the Index has been slowly and steadily eroding, with 8 of the 20 components (UPS, KEX, LSTR, KSU, CSX, CAR, NSC, and UNP) already down 10% or more from their 12 month cyclical highs. Equally noteworthy is the weakness in both FedEx and UPS, which are down 6.50% and 12.50% respectively from their 2014 peaks. If any sector were to benefit from a sharp decline in fuel costs, certainly transports would be atop the list.

This data confirms possible concerns about substantially slowing growth and underlying weakness in final demand; which of late appears to be showing through in economic trends, such as a rising inventory to sales ratio and consistent softness in retail sales.

The Dow Jones Utility Index is also a concern because it has not only lagged over the past several months but, in recent weeks, has tumbled sharply experiencing a 14% decline from January 28 into a recent low on March 11. The recovery in the utilities thus far has been tepid, with the index just barely above a rising 200 day moving average. Year-to-date, the Dow Jones Industrial Average is still up 1.64%, but both of the other Dow Indices are now down for the year, with the transports down 1.87% and the utilities down 3.60%.

At Ocean Park, we view the weakness in the Dow Averages as a suggestion that that the stock market could be nearing a more substantial correction, as talks about Fed tightening and rising interest rates appears to be weighing on many of its sectors.