Dow Theory Divergence Worsens

Another sign that this bull market rally is more likely to be a bull market trap is in the continuing and worsening divergence between transports and the averages. We don't have to get in to the nuts and bolts of Dow Theory, but if the economy is expanding then transports should do well, even if there are expectations for the economy to do better, transports should do well, they deliver the goods that many of your favorite stocks supply.

Here's a look at transports...

 This is the IYT Dow Jones Transport Index Fund vs the Dow-20 Transports, they look virtually identical. Yesterday the IYT (and probably the DJ-20 as well) made 25 day new lows or over 5 trading weeks and on impressive volume.

 Here are transports in green vs. the Dow-30 in white, that's a Dow Theory Divergence or red warning flag.

Even more interesting is the typical leader of risk on rallies, the Russell 2000, is starting to look more like the transports then it is the other averages, another red flag.

As a matter of fact, lets look at the IWM vs the SPY

 The SPY is green, the IWM white. If volume alone doesn't send up a red flag, then the underperformance of the IWM certainly should.

Here's a closer look...

Don't be fooled in to thinking, "This time it's different" when you see the Transports and IWM divergence and certainly not when you look at volume. I've seen many rallies collapse as traders ignored volume which is the second most important indicator you can put on a chart, unfortunately, traders have become lost in a sea of the latest fashionable indicators in their search for the Holy Grail (most traders using Technical Analysis do so out of pure laziness). There is no 1 Holy Grail, the market is a jigsaw puzzle and you have to look everywhere for clues and hints.