The century-old Dow Theory has issued warning signals, suggesting that battered investors may face more pain.

The theory holds that the movements of the Dow Jones Industrial Average and the Dow Jones Transportation Average need to validate each other. In recent days, concerns about the economy and the Trump administration's aggressive tariff policies have intensified, leading to severe damage in the stock market.

As of Thursday's close, the Dow Jones Transportation Average, a key indicator of Consumer and industrial demand, has fallen 19% from its peak in November, approaching bear market territory. Combined with the Dow Jones Industrial Average's 9.3% drop from December's high, this indicator has sounded the alarm bells for the overall stock market.

Todd Sohn, Managing Director of ETF and technical strategy at Strategas Securities, stated: "As a risk barometer, this is not a good sign for the overall market."

Todd Sohn added that the weakness of the two major Dow indices highlights that different areas of the market are rapidly sending Put signals, pointing out that home builders, chip manufacturers, and industrial stocks have all seen significant declines.

Weakness in Transportation and Consumer sectors signals economic distress.

Weakness in the transportation industry reflects broader economic issues. The Dow Jones Transportation Average is viewed as an important indicator of Consumer and industrial demand. Its significant decline indicates that market concerns about the economic outlook are intensifying.

Lee Klaskow, a senior Analyst at Bloomberg Intelligence, wrote in a report this week: "The animal spirits generated after the presidential election seem to have given way to a growing pessimism about the impact of tariffs on inflation and economic activity in the USA."

He pointed out, "The economic transformation is detrimental to freight demand," and mentioned President Trump's comments over the weekend that the USA economy is facing a "transformation period."

Recently, several Airlines and retailers have released cautious performance forecasts, further confirming market concerns. Reportedly, this week, Delta Air Lines Inc. halved its profit expectations, and American Airlines Group Inc. indicated that its first-quarter losses would be about twice the previous guidance. Retailers like Dick’s Sporting Goods Inc. and Kohl’s CORP. also provided sales forecasts that were far below expectations. All of this indicates that both businesses and Consumers are under pressure in the uncertain macroeconomic environment.

Limitations of the Dow Theory.

Although some criticize that the Dow Theory has lost some utility in recent years due to the changing composition of the overall economy, which is now primarily driven by services and technology rather than industrial manufacturing.

However, it is undeniable that as the overall stock market has entered a correction period, the plummet of Transportation stocks (the Index is expected to post its largest weekly decline since September 2022) foreshadows larger troubles ahead.

In summary, the Dow Theory, as a market Indicator that has existed for more than a century, sends warning signals that deserve high attention. Investors should pay attention to changes in economic data and market sentiment and manage risks accordingly.

Editor/rice