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

The broader market keeps roaring but transportation stocks have been left behind. (Justin Sullivan/Getty Images)

Key Points

About This Summary

• The Dow Jones Transportation Average is down more than 1.5% this year, diverging from the broader market.
• Tom Essaye worries the market’s rally may be a ‘bull trap,’ as the Dow Theory says transports must rise with the Dow Industrials.
• Tariff volatility and slowing global growth are headwinds; FedEx’s earnings offer hope, but transports were flat Friday.

To say that this is a raging bull market would be selling this recent rally short. The Dow Jones Industrial Average, the S&P 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 isn’t taking part in the broader market surge: the Dow Jones Transportation Average. In fact, it’s 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.

It’s a mix of airlines, including Delta and Southwest, railroads such as Union Pacific and CSX, truckers Old Dominion and J.B. Hunt, and shippers and logistics leaders FedEx 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.

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 isn’t 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 he’s worried that the broader market’s 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 doesn’t 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 the Dow 30—the latter of which now includes Magnificent Seven members Nvidia, Apple, Microsoft, and Amazon —is still relevant.

Adam Turnquist, chief technical strategist for LPL Financial, also thinks investors shouldn’t dismiss the weakness in transportation stocks.

Turnquist pointed out in a research note that “the macro environment of tariff volatility and slowing global growth” is a headwind for the Dow Transports—and those concerns could hit the broader market again eventually. The key question now, he said, is whether the slump in the Dow Jones Transports will eventually end—or if “its divergence signals a potential false breakout” for the Dow 30.

There are hopes that transportation stocks could soon join the increasingly broadening market rally, though. FedEx’s solid earnings report, posted after Thursday’s market close, is an encouraging sign. Shares of FedEx rose more than 2% on the news Friday.

“FedEx is clearly a bellwether and the results were satisfactory,” said Raphael Thuin, head of capital markets strategies at Tikehau Capital, in an interview with Barron’s on Friday. “Transportation stocks are probably the most sensitive to the economy. So they could be the next leg if this rotation continues.”

Still, FedEx’s earnings weren’t good enough to lift the rest of the sector. The Dow Transports were down slightly Friday and UPS fell 1%. So unless more transportation companies start to report healthy earnings and upbeat guidance, this broader market rally might look more like a bull trap heading into the end of the year.

Write to Paul R. La Monica at paul.lamonica@barrons.com