Want to know the strength of the market? Watch the freight services industry

fedexIf you know anything about Dow Theory, you know that in order for a healthy economy to exist, the industrial index (the makers) and the transportation index (the movers or the freight services) have to be healthy together.

Think of it as a series of checks and balances.  The numbers should add up.  Let’s look at this as an example.  Let’s assume that my company manufactures computer parts and your company is a freight services company.  In other words, you are like UPS, FedEx, or the postal service.  When I manufacture my computer parts, I call you to get them to my customers.  What if I was reporting that my business was strong but you were reporting that it was weak.  That wouldn’t make sense would it?

Of course it wouldn’t.  Sometimes it happens, though, and when it does, the Dow Theory says that you shouldn’t trust the market because something is prime to go wrong.  In late 2008 the stock market imploded.  Any time this happens, investors start looking for signs of a bottom which signals recovery.  In March of 2009, the stock market began a run that saw a nearly 40% gain in 3 months time.  A great debate started where some people said this was a run based not on fundamentals, but emotion.  Others said that it was for real.

On July 6, 2009, an encouraging sign joined the ranks of the news that the economy is, in fact recovering.  Read this excerpt from CNBC.com

“Michael Ducker, in charge of FedEx’s international business, told WirtschaftsWoche in an interview to be published on Monday that the downturn was easing and its internationally transported volumes had not fallen further compared with the previous quarter. “Production seems to be picking up again worldwide,” he was quoted as saying.”

In order for business to be picking up at FedEx, more manufacturing and sales must be taking place in small and large businesses across the planet.  That is a very positive sign for the world economy.

As an investor, keep a watchful eye on the Dow Jones Industrial Average and the Dow Jones Transportation Index.  If they don’t generally match in the charts, be very weary of anything going on that is positive.  If they do match, you can feel a little better about what you see.  The freight services division can tell us a lot about the market.

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