The Dow Jones Transportation Average is a stock market index covering 20 major American transportation companies. It dates back to 1884, meaning it arguably predates the Dow Jones Industrial Average that is usually regarded as the flagship "Dow Jones" index. In comparison to other stock market indices, the Dow Jones Transportation Average has a very stable composition, meaning it is rare that companies are added to or removed from the list of tracked stocks.
Charles Dow's first stock index, created in 1884, covered nine railroad companies. He then published an index of 20 transport stocks in 1886. This was the same year that the Dow Jones Industrial Average, widely known simply as "the Dow" first appeared.
Since then, the composition of the Dow Jones Transportation Average has changed significantly. Originally, 18 of the 20 stocks were railroad companies. This changed with the growth of other forms of transportation, such as roads, marine shipping, and airlines. Union Pacific is the only stock in the index remaining from the original list.
Though the list has changed a great deal historically, over time it has remained remarkably stable. This is because major transportation firms tend to maintain their market positions well. Generally, a change in the list only happens when a company either takes over a competitor or undergoes a major transformation in its core business.
The Dow Jones Transportation Average is price weighted, rather than capitalization weighted. This means that the formula to calculate it does not take account of the relative size of each company. Instead, the calculations are set up so that changes in the stock with the highest market price have the most effect on the index, even though there might be fewer stocks issued for that company and its total market value could be lower than others on the list.
The index is also the source of an economic analysis system dubbed "Dow Theory." The basic principle of the theory is that a shift in momentum in the Dow Jones Industrial Average should not be considered a reliable trend unless it is matched by a similar momentum in the Dow Jones Transportation Average. Though there isn't much academic evidence to support this, the logic behind it is very simple. The theory is that industry stock rises are only sustainable if they are the result of increased consumer demand. The theory then goes that this increase in demand will mean transportation companies have more products to transport, thus boosting their business and their stock price.