Josh Brown: Dow Theory Transports Are Not a Reliable Recession Indicator

Dow Theory and Market Signals

• 💡 Dow Theory suggests that the Dow Jones Transportation Average (DJT) should confirm new highs made by the Dow Industrials.
• 🎯 When both indices made record highs in November, it served as a confirmation signal, allowing investors to remain long.

Transports Divergence and Recession Fears

• ⚠️ In mid-February, the Dow Industrials failed to make a new high, while the Dow Jones Transportation stocks were already in a pullback, indicating a divergence.
• 📉 The DJT is currently in an 18.5% drawdown, approaching a bear market, which is likely to be used as a signal that a recession is imminent.

Historical Analysis of Transports and Recessions

• 📊 Since 1977, the Dow Jones transports have fallen 20% from a high 15 times, most recently in 2022.
• 🚫 However, historically, this 20% decline in transports has only led to a recession six out of those 15 times.
• 📈 Over the last 50 years, there have been more instances of a 20% transport drawdown without a subsequent recession than with one.

Investor Takeaway

• 🧠 Investors are advised to take a deep breath if they hear talk of Dow Theory predicting a recession based on transport performance.
• ✅ The historical data suggests that a 20% drawdown in the Dow Jones transports is not a reliable predictor of an upcoming recession.