Where Transports Lead, Industrials Sure To Go

The Dow Jones Industrial Average, up 24 percent this year, may keep rising, if you believe, as some investors do, that industrial stocks follow transportation shares.

The 20-stock Dow Jones Transportation Average is up 40 percent, led by companies such as Airborne Freight Corp., Ryder System Inc. and UAL Corp. The average set a record 3208.80 last Friday.

Coupled with that, the Dow Jones Utilities Average set a three-year high of 242.92 last week. Believers in the so-called Dow Theory read both as signs that industrial stocks are headed higher.

“I think you’ll likely see the Dow go to a new high, which will confirm the move in utilities and transports,” said Ken Tower, a stock market analyst at UST Securities Corp.

According to the Dow Theory, stocks are in good shape when both the transportation stocks and the industrial stocks break previous highs.

In addition, the theory holds that market trends aren’t likely to last long unless they are backed up by similar moves in the transportation and utility averages. The idea is that transportation and utility stocks are leading barometers of where the economy and interest rates are heading - both critical elements for the stock market.

It’s been two months since the 30-stock industrial average, whose members include Procter & Gamble Co. and Merck & Co., notched its all-time high. It set 39 records in the spring and early summer, registering its most recent one on Aug. 6, when it closed at 8259.31.

Transportation stocks defied the slump in the rest of the market. To followers of the Dow Theory, that bodes well for the industrial stocks because it suggests brisk demand for shipping the goods made by such companies as International Paper Co. and General Electric Co.

An increase in utility stocks improves the investment picture even more. Investors seek to own utilities when they expect low interest rates, as those companies’ big dividends become more attractive. Lower interest rates are good for all companies because they lower borrowing costs and boost profits.

Investors have been putting weight in the relationship between transportation and industrial stocks for almost a century.