Although the stock market is experiencing exceedingly light trading volume, strength in the Dow Jones Transportation Average is strong confirmation that this market will hold up over the near term.
There have been some powerhouse breakouts within this index. FedEx Corporation (NYSE/FDX) experienced a total 180-degree shift in sentiment right at the very end of December. On the stock market, FedEx was trading range-bound for the last three years, then bam! It broke $100.00 a share.
And United Parcel Service, Inc. (NYSE/UPS) experienced a breakout that was even more pronounced, flying from $72.00 a share to over $82.00 a share in just four weeks. It’s no wonder the Dow Jones Transportation Average broke out so significantly; countless names are trading at their highs. J.B. Hunt Transport Services, Inc. (NASDAQ/JBHT) is up 20 points since last September, now trading at an all-time record high.
Transportation stocks are the confirming trend to a stock market that’s gone up meaningfully on mediocre news. There’s been significant strength in the Dow Jones Industrial Index; and considering that earnings have been flat, stock market valuations are still fair.
But the real worrisome trend is trading volume, which has been in steady decline since 2009. Declining volume is a classic bear market signal that reveals a lack of confidence in the market’s future. While U.S. economic news might be showing improvement, for the individual, investor sentiment is not.
There is a disconnect between the economy and the stock market, and it’s not healthy. If you look at the components of the Dow Jones Industrials, you’ll notice that the companies that are doing well are doing exceptionally well. Amongst these stocks, fourth-quarter revenues and earnings saw growth, and share prices are doing great. Some of these companies include: The Walt Disney Company (NYSE/DIS), The Home Depot, Inc. (NYSE/HD), Johnson & Johnson (NYSE/JNJ), and 3M Company (NYSE/MMM). These Dow Jones components are really outperforming.
But the flip side is that other companies, including Alcoa Inc. (NYSE/AA), Caterpillar Inc. (NYSE/CAT), Hewlett-Packard Company (NYSE/HPQ), and Merck & Co. (NYSE/MRK), are still well away from their stock market highs. Just like the economy, the Dow Jones Industrial Index has a lot of underperforming components.
The lack of performance uniformity and low trading volume, to me, signals the end of the current “recovery” stock market we’ve been experiencing since the low in March 2009. With the lack of participation among individual investors and very low trading volume, index moves are exaggerated; this is why the Dow Jones Industrials are up seven percent so far this year, with many components not contributing. (See “Blue Chips: What Earnings Growth Is Saying About Them.”)
The lack of uniformity in the stock market is also playing out in the global economy, where emerging markets like India and Brazil are slowing, while Russia and China are in recovery.
All in all, current stock market action isn’t encouraging—it’s not enough to justify jumping on the bandwagon. First-quarter earnings season will be the catalyst for correction. Until then, the Dow Jones Transportation Average and Industrial Index will likely tick higher.