The main stock market indices basically trend with each other, but in a bull market, leadership from the technology sector must be prevalent.
Stock market leadership since the beginning of the year has been all about the Dow Jones Transportation Average. Up until July, this was followed by the performance of the Dow Jones Industrial Average. Transportation stocks are still this year’s best-performing index among large-caps, but the NASDAQ Composite has finally broken out of its underperformance and is now strengthening relative to the other indices.
This action is very relevant in terms of the stock market’s willingness to be more speculative, and it’s a small, but significant confirmation of the current uptrend. This stock market is way ahead of Main Street fundamentals, but this isn’t an unusual situation by any means, according to history.
The Dow Jones Transportation Average took a significant breather in May and June, recovering strongly in July. From a purely technical perspective, this could be construed as the correction the rest of the stock market didn’t experience. Stock market leadership from transportation stocks is a powerful dynamic in the equity market; it’s unwise to bet against its trend. The chart for the index is featured below:
Chart courtesy of www.StockCharts.com
So with the recent recovery in the transportation index and increased relative strength from the NASDAQ Composite, I’d say current action is very much a broadening of the stock market breakout since the beginning of the year.
And because of these dynamics, more upside could easily be ahead, save for a shock.
There certainly is a divergence of reality between the stock market’s bet on the future and present-day Main Street fundamentals. But this is typical of what a secondary market is all about—it’s about betting on the future, not the present.
And without question, the Federal Reserve could not be more accommodative. The certainty it provides Wall Street is helpful to an unprecedented degree (over the near term) in capital markets. But, the lack of spending velocity by individuals and corporations is a big problem. Balance sheets for consumers and corporations are much better than they were five years ago. And while this is a very good development, it contains growth in an economy that is based on consumption.
The stock market this year has been a big surprise, and I suspect it will continue to be so. Expectations are low among investors in relation to economic growth. The equity market has proven to be extremely resilient in relation to weak economic news from the U.S. economy and China. This resilience is itself a powerful indicator. (See “The One Market Sector That’s Consistently Outperforming the Rest.”)
So, I maintain my view that the stock market is one big hold. But looking at the action, including the solid recovery in the Dow Jones Transportation Average and new strength from the NASDAQ Composite relative to the other large-cap indices, I’d say this market is going higher near-term, save for a shock.