Dow Transports Signal Looming Correction

The Dow Transportation Index is a strong indicator of market direction when compared with the Dow Industrial Average.  Dow theory states that the transports lead the market, since they are more economically sensitive than the Dow Industrials, so if the direction of the transports deviates from the direction of the Industrials, the Industrials and the broader market are most likely going to follow the direction of the Transports.

Here is the chart of the Transports and the Industrials:

The blue line is the Transports and the orange line is the Industrials.  We can see a sharp downturn in the Transports over the past week or so, while the Industrials have maintained their level.  This chart screams that the overall market is about to enter a correction phase.

I have been looking for a correction for a few months now.  I am not a market timer, so when I evaluate the market, I make decisions based on valuations and many other factors.  I never place a time-period for when the change in direction will happen.  I am only focused on making my clients money and protecting them from significant losses.  Sometimes it can take 3 months, 6 months, or even longer for a major change in direction to occur, and sometimes markets will continue to go in a given direction for an extended period of time.  In the long-term, that doesn’t matter – I never expect to catch the exact top or exact bottom.  There is a lot of money to be made in between those two extremes and my MPAM Model Growth Portfolio, (performance available on my website), which I have been managing since 2004, presents a powerful confirmation of the strength of my investment management process.

I believe we are due (overdue) for a significant correction and I remain largely in cash awaiting that event.  Earnings look to be disappointing, and we have plenty of other drivers – Europe, unemployment, slowing GDP growth, and now even North Korea – to serve as catalysts for a correction.  Earnings season will begin shortly, so we should see some early indications of the tone of earnings very soon.

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