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Last updateSat, 29 Jul 2017 12am

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Leading Indicator - Dow Jones Transportation Average why?

Dow Jones Transportation Average is known to be a reliable leading indicator for the broader market based on the theory that transportation companies should be among the first to reflect any slowdown in economic activity that begins to appear on the horizon.

A study conducted by the Bureau of Transportation Statistics in the U.S. Department of Transportation, titled "The Freight Transportation Service Index as a Leading Economic Indicator" reveals that their department's index over the past three decades "led slowdowns in the economy by an average of 4-5 months."

Interestingly, the Freight Transportation Services Index had given advance notification to investors of the Great Recession took place in 2008-09 where the Department of Transportation study found that the index began to slump a full year and a half prior to that recession's beginning.  The broad stock market, in contrast on average gave just two months' advance notice.

Another point to take note is the high correlation between the Freight Transportation Services Index and the Dow Transports - the latest data which only reflects activity during August, shown that the Freight Transportation Services Index hit an all-time high that month.  Likewise, the Dow Transports also showed that its well above its average level for August.

Reference:

MarketWatch, Mark Hulbert, 2014-10-24, "This stock market index is almost like a crystal ball"