Dow Theory states that Dow Industrials and Transports averages must confirm each other (amongst other components of that theory). If these two indices diverge, it’s potentially bearish. The DJIA and S&P 500 have broken out to new all-time highs recently. When the Transports (TRAN) and Utilities (UTIL) indices didn’t confirm the highs on the Industrials, it should raise a red flag in your market prognosis.
If you take a look at the charts on this page, you will see that all three major indices moved up together from October to the end of 2014. however, the utilities sector has been sideways since February, and transports have moved lower in that period. Meanwhile, the industrials moved on to make new highs recently – as did the SPX.
The amount of time that transports and utilities have been diverging from the new highs on the DJIA is becoming a bit concerning. Even the small caps and tech stocks (not shown) are failing to make new highs. I noted back in mid-April that breath, via the New High/Low indicator, has declined in the face of the uptrend in the market indices (http://www.valuetrend.ca/storms-a-comin/).
The market may be in danger of a correction sooner rather than later if breadth, as illustrated by this Dow Theory divergence and other indicators, does not right itself. Please review my video below to further explore this observation.