Transport Index a Dark Harbinger?

Don’t try telling anyone who owns a transportation stock that we’re still in a bull market.

Despite a sharp rebound Wednesday for the Dow Jones industrials, the Dow transportation stock index slid 51.77 points, or 1.8%, to 2,808.44--its lowest since last October.

For investors who believe in the “Dow Theory,” the continuing plunge in the transports index is a bad sign. The theory holds that a bull market is in trouble if the Dow transports are moving counter to the Dow industrials.

In this case, the transports are already deep into their own bear market: The Dow transports index is down 26% from its May peak.

The theory harks back to the days when transportation stocks were considered early indicators of economic trends. A sustained fall in business shipments, for example, was for much of this century considered a harbinger of possible economic recession.

But is the Dow Theory still valid in the “new age” economy? This year, despite a strong economy overall, the transportation industry has been hit hard by rising fuel costs. And Wednesday, several airlines reported weak earnings that partly reflected canceled flights because of Hurricane Floyd.

The big drop in the 20-stock Dow transports index Wednesday was tied to trucking and air freight firm CNF Transportation, which slid $4.94 to $30.50 as investors fretted over a CNF pricing dispute with the U.S. Postal Service.

Richard Russell, veteran editor of Dow Theory market letter in La Jolla, says market bulls always try to pooh-pooh the theory when the Dow transports are signaling trouble while the industrials are still strong.

But according to Russell, history says you can’t sustain a bull market without the transports participating.

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Tumbling Transports

Despite the rally in the Dow Jones industrial average Wednesday,

the Dow transportation index plunged 1.8% to its lowest level in nearly a year. Quarterly closes and latest:

Wednesday: 2,808.44

Source: Bloomberg News