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The chart above plots the Dow Jones Industrial Average (red and black line) alongside the Dow Jones Transportation Average (thinner gray line) giving us a look at what is called “Dow Theory.” A major tenet of the theory holds that these indexes must confirm one another to validate a trend.

It’s plain to see that while the Industrial Average has powered to new highs recently the Transportation Average has failed and clearly diverged from the performance of its sister index. This is probably due to the fact that both FedEx and UPS, two of the largest players in the sector, have recently predicted a significant slowdown in the volume of their business.

Considering the fact that these companies are important economic bellwethers this tenet of the Dow Theory makes good intuitive sense to me. And right now it’s telling us to be wary of the stock market’s recent surge.

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