Beware This ‘Bull Trap’ as Stocks Keep Hitting New Highs

The broader market keeps roaring but transportation stocks have been left behind. Thats a potentially worrisome sign,

To say that this is a raging bull market would be selling this recent rally short. The Dow Jones Industrial Average, the Sap 500, and the Nasdaq Composite all notched new all-time highs again on Friday. Heck, even the small-cap benchmark Russell 2000, which has lagged behind its larger cap brethren for some time now, hit a record close Thursday, its first in nearly four years. It pulled back Friday though.

But there is one other notable index that isnt taking part in the broader market surge: the Dow Jones Transportation Average. In fact, its down almost 2% this year-and that could be a worrisome sign.

This benchmark, often referred to as the Dow Transports for short, is made up of 20 leading transportation companies, none of which are the 30 companies in the broader Dow index.

Its a mix of airlines, including Delta and Southwest, railroads such as Union Pacific and CSX -0.21%V, truckers Old Dominion and J.B.

Hunt, and shippers and logistics leaders FedEx FDX -0.27%Y and UPS. In a nod to the 21st century, ride-sharing king Uber is in the Dow

Transports, too. It was added in February 2024, replacing JetBlue JBLU -0.60% V.

Many market observers keep a close watch on the Dow Transports. Experts often cite the so-called Dow Theory, espoused by Charles Dow, co-founder and editor of The Wall Street Journal. Basically, the theory states that the Transports need to move higher in tandem with the 30 Dow Jones Industrial Average members to confirm that a broader market rally has legs. That isnt happening now.

When both would rise in unison, Dow Theory was considered to be bullish and the economy was seen in an expansion phase, said Tom Essaye, author of The Sevens Report, in his Friday markets newsletter. When one would diverge from the primary trend, it was a warning that the economy was likely losing momentum and at risk of a recession.

With this in mind, Essaye said hes worried that the broader markets rally could be a bull trap, mainly because this time-tested, mechanical investment strategy...continues to flash a significant warning sign.

Skeptics might say that the Dow Theory made more sense during the late 1800s and early 1900s, when the U.S. was in the midst of a railroad boom. But Essaye doesnt buy that argument.

He noted that the current Dow Transports is highly leveraged to the new economy thanks to Uber, as well as the fact that FedEx, UPS, and railroad companies are important parts of the digital commerce logistics food chain. So the relationship between the Dow Transports and and the Dow 30the latter of which now includes Magnificent Seven members Nvidia, Apple ?, Microsoft, and Amazon ?is still relevant.