We want to look at the broad market and treat every single stock market index as a tiny piece of a much bigger puzzle. The Dow Jones Transportation Average has been a great leading indicator for stocks as an asset class over the past few years and we continue to want to treat it that way. Remember, the Transports peaked at the end of 2014, 6 months before the S&P500 and this year the Dow Transports bottomed out in January, well before the S&P500 and the other major indexes bottomed out in February. So now what?
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Here is a chart of the Dow Jones Transportation Average relative to the S&P500. Earlier this month we saw this ratio hold on above the uptrend line from the 2009 lows. The brief failed breakdown combined with a bullish divergence in momentum suggests that the outperformance from the Transports is most likely here to stay:
Looking at it differently, here is a relative strength ratio between the Dow Jones Transportation Average and the Dow Jones Composite Average. Remember that the Composite Average includes 65 companies: all 30 stocks from the Dow Jones Industrial Average, 20 from the Dow Jones Transportation Average and all 15 stocks in the Dow Jones Utility Average. So this compares Transports to the entire basket of the 3 Dow Jones Averages. We are seeing a similar bullish divergence at recent lows and I think this ratio continues higher:
Now that we have a broad based perspective on a relative basis, here is the Dow Jones Transportation Average on its own. To me, this looks like an upside resolution is coming and we want to be long if we’re above that downtrend line since last year (the ETF that closely tracks this index is $IYT):
Underneath the surface, the Dow Jones Railroad Index is breaking out and looks to be a tailwind for Transports as a group. This sub-sector looks great and I think retests the late 2014 highs:
Within that sector, I like Canadian Pacific $CP – same story as up above. Nice bottoming process over the past year and now a breakout. We want to be long $CP if we’re above the April highs. I think we retest the last 2014 highs:
This is a good example of the top/down approach. We first start out with a larger bigger picture thesis. Then we want to find out what could possibly drive that by researching the sub-sectors. Finally we decide whether it is in our best interest to buy the entire sector, a sub-sector or an individual stock within the group. This is all dependent on our overall objectives, risk tolerance and time horizon.
I think this is a good one and keeps working until year end.