My gut tells me that the stock market will soon come to a head in terms of its direction. The stock market is looking for a new catalyst and, whatever that is; share prices will advance or retreat. We’re at the beginning of the lull between earnings seasons (although many small-cap stocks are just starting to report) and economic news will take over from corporate news. I think a key stock market indicator to focus on remains the Dow Jones Transportation Average. This index keeps narrowing its trading range and just looks like it’s ready for a new direction, whatever that might be. Transportation stocks have held up incredibly well considering the price of diesel and gasoline and their earnings as a group continue to outperform.
Many view the Dow Jones Transportation Average as an “out of date” kind of index, but I view it as critical. For the most part, virtually everything in our lives comes to us by truck, rail, airplane or boat. (See My Favorite Benchmark Stocks That Lead the Stock Market.) It represents, in my view, the real pulse of the U.S. economy and, while vulnerable to the spot price of oil, strength in this index is strength in a consumer-driven economy.
Since the beginning of 2000, the Dow Jones Transportation Average has outperformed the NASDAQ, Dow Jones Industrials, and the S&P 500 Index. When technology shares imploded on the stock market beginning in 2000, the Dow Jones Transportation Average began to outperform. It did very well between 2004 and 2009, retreated with everything else during the financial crisis, then roared back to a new record high last year. Without question, this index is an important barometer on the U.S. economy and the stock market.
The Dow Jones Industrial Average is also looking pretty strong at this time. We have decent earnings growth among large-cap companies, reasonable valuations and, while the economic news continues to be mixed, I think institutional investors want to be buyers in this market. The fact of the matter is that there is nowhere else to put your money, while generating at least some return in the form of dividends in order to beat the rate of inflation. The commodity price cycle is real, but, for the most part, investing in it is higher risk and there is very little income to help cushion the exposure.
My technical analysis (which is not well-honed) views the Dow Jones Industrial Average as indicating that it wants to keep ticking higher. The Dow Jones Transportation Average looks like it’s getting tired and therefore is starting to show a bit of divergence. In the end, the stock market is going to go where institutional investors direct it. The stock market is due for a break, but, in an election year, anything is possible.