Is The Negative Momentum Divergence In Transportation A Warning Sign?

Recently our proprietary momentum indicator (RealMotion) seen in the chart above, shows a divergence in momentum and price for the transportation sector (IYT).

While the price of IYT currently sits above the 50-day moving average, it has broken the 50-DMA on momentum.

However, the warning only holds weight if the price also confirms by breaking down below its 50-DMA.

Then, both momentum and price would be on the same track.

Another interesting note is that transportation was the only member of the Economic Modern Family to break its 50-DMA on momentum.

The Family consists of key sectors and one index to bring a clear picture of the health and direction of the market.

Grandad Russell 2000 (IWM)

Transportation (IYT)

Granny Retail (XRT)

Prodigal Son Regional Banks (KRE)

Brother Biotech (IBB)

Sister Semiconductors (SMH)

If any of the Family members begin to significantly diverge from the pack, we note that as either a caution or hopeful sign. Sometimes, it is just typical sector rotation as we saw last July when money began flowing into Retail.

Having said that, all members are currently in a bullish phase.

This means their prices sit above the 50-DMA and the 50-DMA is over the 200-DMA.

So why worry about IYT if every member is bullish? In the past, the transportation sector has acted as underlying support for the overall market. Charles Dow knew of transportation’s importance to the economy and the market as he created the Transportation index 200 years ago. Charles Dow told us that when the movement of goods is steady, everyone else prospers. In other words, the demand side is robust.

Therefore, if transportation begins to weaken, it is possible others could soon follow as that would signal low demand and thereby a weaker economy.

Staying cautious though, does not mean we have to stay on the sidelines. We have been watching many interesting new tech stocks that can give great opportunities going forward into the year.

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