Weakness In Dow Transports Might Be A Warning Sign For Stocks

From Taki Tsaklanos: We warned readers a while back to closely watch 5 leading markets which were at major inflection points, one of them being transports.

The reason the transportation stock market sector is important for the whole investment community is that it is a leading indicator for stock markets, and also a gauge of overall market strength.

Right now, transports are looking weak. The chart below illustrates this point. After a rise to all-time highs in February and March, transports fell back to the important 9000 area. Where the transports go from here will largely determine the stock market outlook.

Interestingly, when analyzing below chart, it looks like transportations are ready to break down. However, a breakdown is only a true breakdown once confirmed. This sector can still move higher from here, even if it does not look strong right now.

In case of a breakdown, the U.S. stock markets as a whole — including the Dow Jones Industrial Average (DJIA) — will be weak.

The first support area kicks in at 8250 points, a decline of almost 10 percent. In such a scenario, the stock market index can also fall some 5 to 7 percent in our humble opinion, after which things have to be evaluated based on intermarket dynamics.

Investors watch closely what happens at 8900 points and, if relevant, at 8250 points in the transportation index.

Dow Transports stock chart

The SPDR Dow Jones Industrial Average ETF (NYSE:DIA) fell $0.37 (-0.18%) in premarket trading Thursday. Year-to-date, DIA has gained 4.13%, versus a 4.70% rise in the benchmark S&P 500 index during the same period.

DIA currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #5 of 74 ETFs in the Large Cap Value ETFs category.

This article is brought to you courtesy of Investing Haven.

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