A concerning divergence has just formed in the markets.

The Dow Jones transportation average has completely split from the broader market, even as the S&P 500 has made consistent new all-time highs over the past year.

Dow Jones Transportation Average Index and S&P 500 Index

Something similar happened in 1999-2000.

Transportation stocks declined while the broader market climbed

This divergence preceded one of the most important market tops in history.

Dow Jones Transportation Average Index and S&P 500 Index

In fact, the same thing happened in 1972-1973.

The Dow Jones Transportation Average started dropping in April 1972, months before the S&P 500’s January 1973 peak.

Dow Jones Transportation Average Index and S&P 500 Index

Today, the transportation sector sits 6% below its 2021 high while the S&P 500 trades 26% above its 2021 peak.

This divergence, known as Dow Theory, was developed in the 1900s and has historically signaled significant market tops.

As this gap continues to build like it did in the 1990s and 1970s, more analysts are likely to focus on this warning sign.

Dow Jones Transportation Average Index and S&P 500 Index

Understanding Transportation’s Role

Transportation stocks are considered cyclical, so they reflect the business cycle more accurately than most other sectors.

When the economy booms, these companies thrive as more goods need shipping.

During slowdowns, decreased consumption means less transportation demand and lower earnings for these companies.

Typically before economic downturns, transportation stocks decline first while less cycle-sensitive sectors keep pushing the market higher.

Eventually, economic pressure becomes too great, and the broader market catches down to the transportion sector.

This pattern preceded several major market tops, such as 2000 and 1973, like we saw earlier.

But even in 2015, transportation stocks trended lower, while the broader market climbed.

A few months later, the market peaked and dropped 15%, catching down to transportation stocks.

Dow Jones Transportation Average Index and S&P 500 Index

Even in 1989, leading up to the 1990 recession, transportation stocks declined as the broader market hit new highs.

Eventually, the S&P 500 fell by 20%, catching down to transportation stocks.

However, there’s a key difference between these divergences and today.

Dow Jones Transportation Average Index and S&P 500 Index

Ready to Profit From This Market?

At Bravos Research, we’re helping members navigate these signals with precision.

Our 2024 performance speaks for itself:

Consistent profitable trades with an avg win of 16.65% in 2024
Real-time buy and sell alerts for every position
Professional risk management strategies

We recently booked a 16.66% profit on Amazon.

New Year Special: 30% Limited Time Discount!

Click here to join Bravos Research

Today’s Crucial Difference

Unlike previous instances, today’s transportation sector maintains an uptrend despite its underperformance.

It’s making higher lows and higher highs, with upward-pointing moving averages.

Dow Jones Transportation Average Index

This is quite different from the downtrend seen in 2015.

Dow Jones Transportation Average Index

The same was true in 1999, when transportation stocks and their moving averages were clearly declining.

Dow Jones

Even in 1972, the story was similar.

So, the current gap between transportation stocks and the S&P 500 could continue to grow.

Luckily, history does offer a clue about how wide this divergence might get.

Dow Jones

The Divergence Could Widen

Since October 2023, transportation has underperformed the S&P 500 by 27%.

This can be seen through the transportation-to-S&P 500 ratio.

But history suggests this gap could grow substantially.

Dow Jones/S&P 500

In 1999-2000, the transportation sector underperformed the S&P 500 by a massive 50% between 1998 to 2000.

Today’s market has striking similarities to that late-1990s environment.

Dow Jones/S&P 500

For instance, growth stocks now drive 50% of S&P 500 earnings.

This is similar to the elevated levels in 1999.

S&P 500 Earnings

This marks a big shift from 2001-2008, when growth represented just 10% of earnings and cyclical stocks like transportation dominated at 80% versus today’s 30%.

Growth Stock Now Account for Over 50% of S&P 500 Earnings

This fundamental change in market composition means transport weakness might not impact the broader market as significantly as in past cycles.

The reduced influence of cyclical stocks allows growth sectors to potentially drive continued market gains despite transport sector weakness for now.

While the divergence suggests underlying trouble, the gap might expand significantly more before affecting the broader market, potentially even exceeding the extremes seen in 1999.

Dow Jones and S&P 500

Given these conditions, we maintain net long exposure through our active trades.

Recent market volatility has provided us the opportunity to put on new positions, particularly in technology stocks like Amazon, Google, Tesla, and Klaviyo.

We expect these names to outperform in the coming months.