According to a study run by the Bureau of Transportation Statistics, which is based on the Freight Transportation Services Index over three decades, a slowdown in freight has led to an economic slowdown on an average of four to five months later.

Market Timing

The Dow Jones Transportation Index peaked in March and has been moving lower ever since. At the same time, the Dow Jones Industrial Average has been gaining steady ground. This could indicate that the Dow Jones Industrial Average is overvalued. If a slowdown in Dow Transports truly indicates a slowdown in the economy four to five months into the future, it would put that economic slowdown in July-August. (For more, see: Is the DJ Transportation Average Headed Into a Bear Market?)

Transport Logic

There is no guarantee that this indicator will continue to be accurate. It’s simply another factor to consider. The reason it might make sense is because transports are responsible for moving goods and materials. If Dow Transports move higher, it indicates that demand for those goods and materials is high. If Dow Transports move lower, it indicates that demand for those goods and materials is low. This all stems back to consumer incomes and confidence, as well as business capital allocation and confidence.

Looking Ahead

It should be pointed out that the Dow Jones Transportation Index had been performing well for the majority of the raging bull market that has taken place since the financial crisis. This trend has changed as of late. On the other hand, a one-month dip could be a blip. You will have an opportunity to have a better gauge on the situation April 13 when the Transportation Department releases its next reading for the Freight Transportation Services Index, which will be for February. At that time, you will be able to see if a move lower in the Dow Transports was justifiable or not. (For more, see: How is the Dow Jones Industrial Average Used in the Dow Theory?)

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