Transports Suggest Bull Market Still Early
Michael is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
“There can be no doubt that the transportation sector is the most critical sector of our economy.” - Robert Brady
I get the growing sense that traders and investors really don't know what to do in this market. After all, equities are having their best start to a year in decades, with some emerging markets (NYSEMKT: VWO) up well over 20% for the year (and the year is only four weeks!). Most managers are likely underweight risk-assets, and are hoping for a pullback to position back into stocks. Yet, every time markets have tried to decline this year, it's been fairly shallow and too short-lived. Many still believe that this is nothing more than a rally in a secular bear market.
While it's possible this is nothing more than a short-lived advance, it's worth considering what various intermarket trends are signaling. Take a look below at the price ratio of the iShares Dow Jones Transportation Average (NYSEMKT: IYT) relative to the Dow Jones Industrial Average (NYSEMKT: DIA). As a reminder, a rising price ratio means the numerator/IYT is outperforming (up more/down less) the denominator/DIA.
According to Dow Theory, a move higher in Industrials (which is an average of stocks that make things) must be confirmed by a move higher in Transports (which ship things). As such, a healthy bull market likely should be led by stocks like UPS (NYSE: UPS) and FedEx (NYSE: FDX) outperforming as it suggests investors expect a pickup in moving goods. Practically speaking, this occurs when expectations for an improving economy are rising.
You can see the ratio peaked out in early 2010 and collapsed starting in July of 2011 as the Summer Crash was taking place. Notice how sharply Transport outperformed off of the October low (Fall Melt-Up), and the sector has been grinding higher relative to the Dow Jones Industrial Average ever since. The main thing I want to point out is that the trend in strength remains, with further potential to get back to pre-Summer Crash levels. The leadership in Transports is a healthy sign for stocks, and while a pullback in broader averages could occur, the conditions still seem to favor beta.
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