A week after a bullish golden cross pattern formed in the Dow Jones Industrial Average DJIA,
Indeed, the Dow Jones Transportation Average DJT,
The 50-day for the transports, which tracks the performance of 20 large U.S. airlines, truckers, railroads and shippers, was at 9,535.54, while the 200-day stood at 9,635.68 Monday evening, or about 1% from the short-term average (see chart below):
On top of that, the small-capitalization Russell 2000 index RUT,
The recent rally in the overall market has been largely fueled by investor demand for shares of fast-growing, highflying technology-related stocks, at the apparent expense of other areas of the market such as transports and small-capitalization stocks that tend to be viewed as slower-growing and more sensitive to the vagaries of the economy and the impact of coronavirus in particular.
Notably, the Dow transports are viewed by so-called Dow theorists as a further tool to confirm an overall trend in the stock market. Dow Theory is based around the idea that watching how Dow Jones benchmarks behave can provide clues about future market direction.
The technology-heavy Nasdaq Composite Index COMP,
Although the Dow industrials formed a golden-cross last week, transports and small-cap stocks have mounted a steady resurgence that have outperformed the broader market based on their returns since the March 23 lows.
Hopefulness about the state of the economy in the aftermath the COVID-19 pandemic has spurred transports up by more than 62% from the low point of the market on March 23, which is widely viewed as the apex of fears surrounding the economic impact of the coronavirus. The Russell 2000 has climbed 58% since that late-March low. Comparatively, the S&P 500 is up 50%, the Dow is up more than 49% and the Nasdaq is up nearly 60% over the past five months, as of Monday’s close.
That said, transports saw a more pronounced fall ahead of the lows as did small-caps, and neither the transports nor the Russell 2000 index have put in a record close in nearly two years.
Transports closed on Monday at their highest level since Feb. 21, helped partly by a surge in shares of FedEx Corp FDX,
One tenet of Dow theory is that both the industrials and the transports have to send the same signals to confirm bullish (and bearish market trends), with a higher high for one necessarily coming as, or soon after, the other does the same.
Some analysts have also looked for confirmation in the uptrend for stocks in small-caps, banks and energy to assess the staying power of current the run-up for the broader market.
