The Dow theory was better suited to the transportation index itself than to industry
The Dow Jones Industrial Average (DJI) had a stellar year, but the Dow Jones Transportation Index (DJT) had an even better year. This is good news according to Dow Theory. The Dow Theory, developed by the Wall Street Journal founder Charles Dow, states that if the Dow rises higher, the transportation index should also be higher. The transportation index includes many companies that ship goods, so the strength of these companies indicates the strength of the economy. If transport companies are lagging, it could indicate a decline in industrials. Let’s look at some numbers to see if this theory is believable.
Year to date
The Dow is up an impressive 12% so far this year. However, the transport index has doubled by 25% since the beginning of the year. In 1950, I looked at years when the Dow was up at least 10% at that point in the year. The tables below compare the future performance of the Dow based on whether the transport index outperformed or lagged the Dow.
There could be something in this theory. If the Dow was up 10% at this point and transports outperformed the index, the Dow had an average gain of 6.86% for the remainder of the year. However, if transports lagged industrial values, the Dow only gained 1.94% on average over the remainder of the year. In both cases, about 80% of the returns were positive. When looking at short-term returns, it doesn’t matter what the transportation index did. If the Dow was in double digits at this point, stocks were in trouble. When transportation beat the Dow, the Dow posted an average loss of 0.6%, with 40% of the returns being positive. When the transports lagged, the average loss was 1.04%, with 44% positive.
The Dow theory was better suited to the transportation index itself than to industry. The following tables summarize the returns for the transportation index. By the time the Dow was getting into double digits and Transportation was doing even better, the Transportation Index averaged 12.5% for the remainder of the year, with nine of the ten returns being positive. When the Dow soared but transports lagged, the transport index lost over 4% on average, with only 33% of returns being positive. Strong outperformance can also be seen in short-term returns.
Finally, the following tables show the individual instances of the data summarized above. First, I’ll show the returns on the Dow Jones Industrial Average after years of up 10% or more and the Dow Transportation Index up even more. I ventured this year along with 2013, 1997 and 1983. In those years, both indices were within a percentage of an all-time high. This bodes well as the Dow was positive on all three occasions for the remainder of the year.
In these cases you will find returns for the transportation index. This index also did very well under these circumstances.