NEW YORK (AP) – One of the oldest trading strategies in the book is showing a yellow flag for stock investors, but analysts say it’s not quite time to sell yet.
The Dow Jones industrial average closed at an all-time high last month, extending a bull market that stretches back more than six years. However, another gauge that tracks airlines, railroad and freight companies – the Dow Jones transportation average – has gone the other way, slumping to a seven-month low at the end of May.
The theory is that the transportation sector is a leading indicator for the economy. If consumers and business are buying more, then goods have to be transported by plane, rail or ship. That should benefit the companies moving the goods.
If they’re buying less, the thinking goes, there’s less demand for transportation services, meaning trouble ahead for the economy and the stock market.
That thought is the underpinning of Dow Theory, a system for timing when to get in and get out of the stock market. It’s based on the musings of Charles Dow, the co-founder of Dow Jones & Co., who started assembling stock indexes in the late 1800s. Adherents to the strategy say that it signaled big stock market sell-offs in 1929, 1937 and 2000.