DOW

THEORY
Transports The Dow Jones Transporta4on Average (DJTA, also called the "Dow Jones Transports") is a U.S stock market index from Dow Jones Indexes of the transporta@on sector, and is the most widely recognized gauge of the American transporta@on sector. It is the oldest stock index s@ll in use, even older than its beHer-known rela@ve, the Dow Jones Industrial Average (DJIA).

 What stocks make up the Transports?

The Dow Jones Transporta@on Index includes 20 members or component companies. Each of these companies is assigned a weight that is used along with the stock's price to calculate the Transporta@on Index. For example, FedEx has a weight of around 10%. That means that approximately 10% of the movement in the Transporta@on Index can be explained by the stock price of FedEx.

 Ever since it was rst introduced by Charles Dow; the Industrial Average has been used by various theorists in an aHempt to predict movements in the stock market. One of these theories is called the Dow Theory. The Dow Theory is supposedly based on the early wri@ngs of Charles Dow. A rise in the Dow Jones Industrial Average must be "conrmed" by the Dow Jones Transporta4on Average in order for the rise in the market to be sustainable. This theory is based on the simple rela4onship that exists between "industrials" that make products and the "transporta4ons" that ship the product. An easy to remember version is that one "makes" and the other "takes. In reality, the interac@on is much more complex than it appears on the surface; however, many investors today s@ll closely monitor the interac@on of the Industrials and Transports. You'll oXen hear talk of the Dow Theory when the Industrials and Transports diverge; a situa@on that should raise a warning ag for stock market investors.

What is DOW Theory telling us today? DJT vs S&P 500(SPY)

NASDAQ, Apple & Russell 2000

The Russell 2000 is an index comprised of small-mid cap businesses. The reason why I think it is important to pay aHen@on to it is because if we are really having a recovery the Russell should be going up in price as well. Apple Inc. was cut to 12.3 percent from 20.5 percent of the index in April 2011, but a surge in price has pushed it back up to 17.2 percent -- and the other big names have seen their share prices balloon as well. A rebalance of the index will be triggered if Apple grows to more than 24 percent, or if the collec@ve weight of all components over 4.5 percent exceeds 48 percent. Along with Apple, the four names domina@ng the average are Google Inc , MicrosoL Corp , Intel Corp and Oracle Corp . The growth of the top ve companies increases the likelihood that the biggest names in the average will soon make up 48 percent of the Nasdaq 100 (.NDX). Currently, MicrosoX is the second-largest component, with a weigh@ng of 9.4 percent, followed by Google (5.5 percent), Oracle (5.3 percent), and Intel (4.8 percent). At the rebalance, MicrosoX's weigh@ng was bumped to 8.3 percent from 3.4 percent, and it has grown since. The ve top names add up to 42.2 percent. That's up from 37.3 percent when the index was rebalanced, so their inuence is growing but has not reached a point where a rebalance will occur.

Why does weigh@ng maHer? Even with the other stocks taking a bigger part of the average, Apple is s@ll

the $500 billion gorilla. The outsized inuence of the technology giant means that on days when the Nasdaq sees big swings, Apple is the primary driver. How much does it maHer? The stock's nearly 30 percent gains year-to-date are responsible for essen@ally all of the Nasdaq 100's 13.4 percent rise in 2012. "Apple has such a big weigh@ng that it makes fundamentals less important for other names in the index, resul@ng in an environment where Dell Inc can trade based on the number of iPads Apple sells," said Todd Schoenberger, managing director at LandColt Trading in Wilmington, Delaware. If Apple stock falls, Schoenberger said, "the whole tech sector is unfairly vulnerable."