Dow's record run leaves transports behind. Here's what it means for stocks.

By Mark Hulbert

The broad market typically does better when Dow Industrials outperforms the Dow Transports

The Dow Jones Industrial Average DJIA hit a new all-time high on Monday of this week, but its sister index - the Dow Jones Transportation Average DJT - is currently 7% below its high set in November 2021, almost three years ago.

How unusual is the underperformance of the Dow Transports - and how concerning is it?

History suggests neither. Consider the period from September 1929 through February 1964, which is plotted in the chart below. This stretch holds the record for the longest period when the Dow Transports did not hit a new high. In comparison, the current stretch of two years and 10 months hardly deserves a mention.

Nor was this period a universally terrible time for U.S. stocks overall. Though the early 1930s were the years of the Great Depression, by late 1936 the broad market had surpassed its 1929 high (in inflation-adjusted total return terms). From then until February 1964, there were no fewer than nine bull markets, according to the calendar maintained by Ned Davis Research.

This result is not just a fluke of this period of many decades ago. As I discussed in a column earlier this year, the broad market typically performs better following periods in which the Dow Industrials (DJIA) have outperformed the Dow Transports (DJTA). At the time of that column, the DJIA was sitting on a far better trailing return than the DJTA, and I concluded that there was no reason to worry about this divergence.

Since that column was published, the broad market has risen 11.8% (as measured by the S&P 500's SPX total return index). Though it would be going too far to conclude from the DJIA-DJTA divergence that the next six months will see a similar gain, the divergence in and of itself is not something to worry about.

False signals

This history reveals a broader truth about bull markets: Not all divergences are a source of concern. One spectacular recent example is the lagging energy sector: The energy stocks within the S&P 500 today are, as a group, below where they stood in the summer of 2014 - more than a decade ago. (This is measured by the Energy Select Sector SPDR ETF XLE.) Yet the S&P 500 has gained close to 200% (before dividends) over this same 10+ year period.

The current sector's relative-strength rankings are shown in the chart above. As was the case in April, those rankings are not indicating that the current bull market is in its final three months.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

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-Mark Hulbert

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09-21-24 1206ET

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