The chart below illustrates a few incidences where the Dow Industrials and Dow Transports diverged over a few months. As you can see, when the industrials (green line) were moving up while the Transports (red/black line) moved down, you eventually saw a correction in the industrials. Conversely, we saw the transportation stocks rise while the Industrials trended down over the late summer and fall in 2016. This divergence lead to a rally in the industrials after the election.
Right now, the transports (TRAN) are failing to rise in the face of the new highs on the industrial index (INDU). While it’s not been a trend—as had been the past patterns of divergence I’ve drawn on the chart – it’s something we want to keep an eye on. A prolonged lack of confirmation by the transports will likely be bearish for the big industrial index. It’s too early to draw a conclusion, and the end of February / early March can often be a bit choppy, so this might just be a moment of volatility. But we should remain aware of the recent non-confirmation and look for potential follow-up in the future. If the transports illustrate a pattern of trending down for a number of weeks or a few months, it may indeed be a sign of nasty times to come.