Summer is officially here. I hope you had a safe and fun Memorial Day weekend. Vacationers at Daytona Beach were warned this week about deadly riptides that caused lifeguards to pull more than 200 swimmers from the water in one day. I was in the water with my family and even though I grew up in Florida swimming at these beaches, the tides were strong enough to cause problems for anyone with out a float or surfboard.
Lifeguards had red flags out to warn swimmers of the danger but few people noticed or heeded the warning. The stock market is sending warning signs of a similar nature.
After the markets reopened Tuesday, the riptide developing between the Dow Jones Transports and the S&P 500 became significant enough that investors took notice. The transportation stocks in the Dow Jones Transports Index are down about 8 1/2% this year while the broader stock market is up.
This relationship is developed into a common portfolio measurement known as Dow Theory and it was one of the factors to Tuesday’s big drop in stocks.
This divergence is a sign that meaningful cracks are developing in the market. Combined with the weak manufacturing news from the Dallas Fed signals a summer warning for stock investors who have enjoyed remarkably calm seas over the last three years. Raising cash in this market looks to be a prudent course to chart.