Two phenomena that have characterized the stock market rally over the past year and a half are 1) buy the dip, aka, BTD – and 2) rotation. Both are evident in today’s Chart Of The Day. It shows the Dow Jones Transportation Average (DJT) finally breaking out to a new all-time high after a 7-month consolidation.
The DJT formed its previous all-time high back in 2014-2015 in the vicinity of the 9200 level. Following a brutal decline during the 2015-2016 correction, the DJT appeared to be stuck in neutral for much of last year, even as many market segments were able to ascend to new all-time highs. Following the U.S. Presidential election last fall, the transport stocks finally got back in gear again.
In about a month’s time, the DJT was able to climb roughly 15%, setting a new all-time high in the process. Since its December peak, however, the index has basically moved sideways for 7 months. That is not unusual, nor particularly unhealthy, for an index following a test of its former highs, however. The consolidation allows it go catch its breath and build up fuel to allow for a sustainable breakout to new highs, if and when it does come.
To boot, the journey that the DJT has taken over the past 2 and a half years has arguably carved out a variant “cup-&-handle” pattern. As we have discussed before, this is traditionally a bullish formation, often leading to a breakout and new leg higher. That may be under way now.
With every dip in the rally, investors appear to be more and more concerned that the bull run is over. However, until “BTD” is no longer the order of the day, there appears to be little to be concerned about in the immediate term. Once again, this week brought another “dip” in stocks, induced largely by the selloff in technology stocks over the past month. Once again, the weakness had some traders on the ropes. However, if today is an indication, BTD is still in effect, and is currently being led by the transports.
That handoff in leadership – from techs to transports – is another manifestation of the “rotation” still evident in this rally. When one sector stumbles, there is another to take the reins. And as long as that continues to be the case, any major damage will likely remain at bay.
At this time, one of the main beneficiaries of both BTD and rotation is the transportation sector which, after several trying years, is back on the go into all-time high ground again.
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The iShares Transportation Average ETF (NYSE:IYT) closed at $174.57 on Friday, up $2.19 (+1.27%). Year-to-date, IYT has gained 7.20%, versus a 8.31% rise in the benchmark S&P 500 index during the same period.
Disclaimer: JLFMI’s actual investment decisions are based on our proprietary models. The conclusions based on the study in this letter may or may not be consistent with JLFMI’s actual investment posture at any given time. Additionally, the commentary provided here is for informational purposes only and should not be taken as a recommendation to invest in any specific securities or according to any specific methodologies. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.
This article is brought to you courtesy of Dana Lyons, JLFMI and My401kPro.