FedEx Corp.’s profit warning has cast a pall on the broader stock market, as a record plunge in the package delivery giant’s stock has helped trigger one half of a Dow Theory “sell” signal.
FedEx shares
FDX,
plunged 21.6% in afternoon trading Friday to a two-year low. The $44.25 price decline shaved about 270 points off the Dow Jones Transportation Average
DJT,
accounting for more than one-third of the Dow transports’ 774-point, or 5.7% drop. Read more about FedEx’s profit warning.
The transportation sector tracker is on track to close below its June low, which at the time marked the lowest close in 16 months.
The Dow transports’ selloff is sending an important message about the health of the broader stock market, given that the index is viewed by many as a leading economic indicator. There’s a saying on Wall Street that the companies in the Dow transports “take” to buyers what the companies in the Dow Jones Industrial Average
DJIA,
“make.”
And basically, if transports aren’t taking, the economy isn’t moving, and the stock market will be falling.
Don’t miss: Why FedEx’s profit warning is such bad news for the U.S. economy, and FedEx shares on track for their worst week since the 1987 stock market crash.
The Dow transports’ new low follows a big 18.2% bounce off the June low to the mid-August closing high. But since that high was well below the first recovery high seen in March, which in turn was below the November 2021 record close, the index has continued a pattern of lower lows and lower highs, which many Wall Street chart watchers say defines a bear market.
And perhaps more significantly, the lower low completes one half of a “sell” signal, according to some followers of the century-old Dow Theory of market analysis.
Also read: Dow transports selloff may be warning of something more than just a macro speed bump.
Read more: Don’t dis the Dow Theory just because it’s over 100 years old.
As Mark Hulbert, MarketWatch contributor and founder of Hulbert Ratings LLC, has written, many agree that there are three key ingredients to a Dow Theory “sell” signal.
First, the Dow industrials and Dow transports must suffer significant selloffs after reaching new highs — Check. The respective June closing lows marked a 24.4% decline in the Dow transports from its record close in November and an 18.8% drop in the Dow industrials from a January record close.
FactSet, MarketWatch
Second, significant rallies off the respective lows fail to reach the previous highs — Check. The Dow transports bounced 18.2% off its June low, and the Dow industrials bounced 14.3%, to the mid-August highs, but those highs were well below the respective previous highs.
And third, both indexes fall below the lows referenced in the “First” ingredient — the indexes are halfway there.
The Dow transports have checked that box, but the Dow industrials, which slumped 328 points, or 1.1%, Friday afternoon, were still about 745 points above the June 17 closing low of 29,888.78.
