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Analysts have already lowered 2012 profit estimates for the S&P 500 from the 9% range down to the 6% range. Granted, profits may still be rising. But what could happen to stock prices when profits are climbing at a slower pace? And what happens if the manufacturers who are producing at a slower pace ultimately find themselves shipping less goods?

In Dow Theory, the Dow Jones Transportation Average (DJT), or the exchange-traded fund iShares DJ Transportation (NYSEARCA:IYT), is expected to move in the same direction as the Dow Jones Industrials (DJI). In fact, a fund like IYT should be blazing the trail for the Dow Jones Industrial Trust (NYSEARCA:DIA). Therefore, it is problematic for the near-term momentum of a stock market bull when transporters (e.g., railroads, trucking, airlines, ships, etc.) transport less of the manufacturing segment’s output.

What if IYT and DIA actually diverge? This is typically viewed as a significant warning that a change may occur.

Keep in mind, many technical chartists, hedge fund managers and high-level decision-makers value Dow Theory data. And right now, as the Dow Industrials flirts with the 13,000 level, IYT struggles to hold itself above a 50-day moving average.

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IYT 50

The iShares DJ Transportation Fund (IYT) peaked on 2/3/2012 at an approximate price point of 96, and has since corrected 4.1%. And while that’s not exactly a monstrous sell-off, it is certainly worth watching. After all, there are other transportation-related technical warnings for the overall well-being of U.S. stock assets.

Scores of traders tend to track the bullish percent index of the transportation sector known by the acronym, BPTRAN. A chart for BPTRAN can indicate momentum, but is more often used when a bullish percent index (BPI) rallies above 80. When it does so, the sector itself is vulnerable to a decline based on “overbought” conditions, and a sell signal may be generated when BPTRAN subsequently declines below a 20-day trendline.

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BPTRan 20

Over the last year, there is only one incident in May when the price of BPTRAN charted this path. And shortly thereafter, the overall stock market experienced a rather sharp correction. Currently, BPTRAN reached even higher levels of “oversold” conditions at a bullish percentage index of 90, and it is now below the trendline at 80.

I’m not predicting doom-n-gloom for stocks. Yet it is foolish to ignore crude oil at $109 per barrel, or the adverse effects skyrocketing energy prices can have on GDP, consumer purchasing habits and corporate profits.

Rather than sell positions in fear, incorporate sensible stop-limit loss orders and/or install a temporary hedge with iPath S&P 500 VIX Mid-Term ETN (NYSEARCA:VXZ). You may have every reason to be bullish for the 2012 year over the course of 12 months. Nevertheless, there’s no reason to let painful corrections or bearish periods wreak havoc on your portfolio.

Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.

Source: Transportation ETF Fires A Dow Theory Warning Shot