There's a Lot to Gain from This Dow Theory "Failure"

I've been a little quiet lately. It's not that I don't have a lot to say, it's just that I've spent most of my time staring at the screen each trading day asking, "How?" and "Why?"

You see, that's what happens when markets get irrational. Traders like myself - and I mean those that have been around for more than a few market cycles - look at a market like this and ask questions because there's something to be learned... and of course, money to be made.

As much as most people want to think that markets don't change, they do. Like anything else, they evolve. More data, more coverage, more participation, more politics, etc. - all of these things force the market and its participants to evolve.

That said, there are a few rules that remain constant.

Value is desirable... Take a risk to be rewarded... The economy leads the market (not the other way around)...

Keep that last one in mind, and you have to fall back on the "Dow Theory." Here is how Investopedia defines this old chestnut...

"The Dow Theory holds that the market is in an upward trend if one of its averages (industrial or transportation) advances above a previous important high and is accompanied or followed by a similar advance in the other average. For example, if the Dow Jones Industrial Average (DJIA) climbs to an intermediate high, the Dow Jones Transportation Average (DJTA) is expected to follow suit within a reasonable period of time."

So, the Dow hit a new high last week - that's one part of this age-old theory. The Dow Jones Transportation Index hit a new high... in April... and it's heading into a bearish trend.

That is a signal telling you and me to stay away from - or even short - this sector aggressively.

There are a couple of other "problems" pointing us to profits...

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We're Looking at a Stock Picker's Market

One problem is the breadth of the move in the transportation sector. As of yesterday, only one of the companies in the transportation group had made new 12-month highs. Genesee & Wyoming Inc. (NYSE: GWR) is that company, and the only reason the shares are at new highs is because they've become an acquisition target. That's yet another problem.

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If you subscribe to my Night Trader or Seismic Profits Alert services, it's no surprise that I've had a bearish outlook. Sure, I've been burned by some short positions, but I'll let you in on something...

I'm confident that this strategy is going to leave others in my dust.

You see, the market is getting distracted by shiny objects like interest rate cuts, talk of trade deals, and other items. All the while, the EKG of the market is flashing some warning signs.

Okay, I'm jumping off my soapbox - I'm sure you get the idea.

For what it's worth, this market has turned into a "stock picker's market" for the first time in more than five years. I know this because I'm the numbers nerd that watches the correlation between individual stocks and their benchmarks.

We're hitting a point where the buy-and-hold index investor is getting ready to get slaughtered. You've got to know WHICH stocks to buy and in WHICH sectors. Here's the rundown for the Transportation Index as of today...

Grab These Bearish Opportunities Now

FedEx Corp. (NYSE: FDX), the well-known delivery services company, once held the overnight next-day market in its hand. Now, the company has been picked apart by the competition for Inc. (NASDAQ: AMZN), Walmart Inc. (NYSE: WMT), and other online retailers' business.

The latest headwind for FedEx has been the effects of the trade wars, which will ultimately, if unsolved, decrease the international shipping volume for FedEx. In addition to the slowdown in shipping volume, the volume of products shipped domestically is too slow with the economy, as the Dow Theory activity suggests.

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My Best in Breed model rates FedEx shares as one of the laggards in this slowing sector with a price target of $90.

Another multimodal transportation company, CSX Corp. (NASDAQ: CSX), is a true read on the economy as it ships everything from lumber to oil & gas, inventories for retail stores, and cars. This is a real cross section of what drives the spending around our economy.

Recent activity is showing some slowing, except the forecasts do include a ramp-up in domestic oil shipping in the case that crude oil prices continue to climb. This will increase domestic production and shipping.

Either way you cut it, the trade trends and the shifting trends in the stock price are targeting a move toward $72, a move of almost 7% that investors would surely rather miss if they hold the shares. For traders like myself, it's also a large enough move to leverage with puts.

As I mentioned, this market is fracturing into a "stock picker's market," meaning that there are bearish opportunities to be had. I'll highlight a few of these from my Best in Breed system for you tomorrow.

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About the Author

Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.

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