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Bearish Dow theory signal suggests more pain ahead for stocks

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A 100 year-old stock market indicator is flashing bearish signals that point to more pain ahead for investors

suggests that the relationship between the two indexes could send a broader signal to investors about the future direction of the stock market.

The transportation and industrial averages should ultimately confirm new highs or new lows in the market, and when they don't, investors should start to pay close attention. The initial bearish signal from Dow Theory flashed in early 2022 when the industrials average made a new record high and the transportation average failed to follow suit. Now, the exact opposite is happening, with transportation stocks leading the way higher while the industrials average flounders.

"The Dow Jones Industrial Average and the Dow Jones Transportation Average have struggled to move to new highs together, which is needed to suggest a more bullish setup for Dow Theory,""These bearish divergences into late 2022 and early 2023 show a disconnected equity market, keeping the bearish signal for Dow Theory from early 2022 intact," Suttmeier said.

For now, Suttmeier said sentiment whipsaws between bullish and bearish investors makes for a stock market that has little conviction in which direction to move in, just like the Dow Jones Transportation and Industrial averages.

 

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