This Undercover Comeback Just Triggered a Powerful Rally
Two short weeks ago, investors panicked as the Dow Jones Industrial Average plunged as much as 700 points to begin the second quarter.
Along with the Dow Jones Transportation Average, the industrials were painfully close to triggering a Dow Theory sell signal — a bearish indicator that warns of a major change in the market’s primary trend.
The idea behind Dow Theory is that we can measure the overall health of the economy by examining the performance of the big industrial and transportation averages. If the industrials are performing well along with the transports, we can assume goods are being made and delivered. In other words, the economy is humming along.
But if the transports and industrials both fall below key levels, we can interpret the confirming moves as an early warning sign that the market could suffer a bigger drawdown.
For the record, industrial and transportation names have remained in sync so far this year. As the DJIA first began to correct in February, the transports followed with a nearly identical decline.
But the transports are beginning to show new signs of life. These depressed stocks are catching a bid as the recovery continues, leaving their industrial cousins in the dust. The Dow Jones Transportation Average posted impressive gains of more than 2.3% on Monday, compared to the DJIA’s gain of less than 1%.
The performance gap between the transports and industrials is beginning to widen. Since the market topped out in late January, the industrials remain 6.9% from their peak. The transports, meanwhile, are only 3.6% away from breakeven.
After nearly breaking down twice this year at critical support levels, buyers are breathing new life into transportation stocks.
This week’s impressive comeback is a welcome change for transportation names considering the group drastically underperformed the industrials during a majority of the 2017 melt up.
In fact, transportation stocks went nowhere during the first eight months of 2017. The Dow Jones Transportation Average topped out on the first day of March. This false breakout led to a swift move lower. Just a few weeks later, we found the transports perched dangerously close to correction territory.
A quick comeback saved the sector from disaster. But the group wasn’t ready for prime time just yet. By the end of August, the transports were flat on the year — even as the major averages jumped to double-digit gains.
But as the market melt up shifted into overdrive during the holiday season, the sickly transports finally showed signs of life. It all started in mid-November when the transports posted a nice little one-day rally, launching higher by more than 1.6%. What followed was nothing short of incredible…
As it turns out, the little rally was the spark the sector needed to set up for a big breakout. The Dow Jones Transportation Average then embarked on a three-day tear fit for the history books. The group posted a massive three-day gain of more than 7% to close out November trading. By the time stocks topped out in January, the transports had gained more than 18% in just seven weeks.
It’s a bullish sign to see these lagging transportation stocks make up for lost ground once again. If transports continue to lead off the market’s recent lows, you’ll be well positioned to book profits.