Dow Jones Transportation Average (DTX.I)
Technical action in equity markets over the last week has remained constructive and encouraging. On several occasions, morning declines in US index futures have been shrugged off and indices have powered ahead through the trading day to positive closes, a sign of strengthening accumulation. Looking at the larger picture, the completion of bullish Head and Shoulders bases, bullish Golden Crosses, and Bullish Catapults in several indices, sectors, and individual stocks in recent days (some of which have been highlighted in recent editions of the Daily Stock Report), suggest an equity market recovery may be getting underway.
These advances have come in the face of mixed earnings and economic news and continued tightening from the Fed, suggesting that equity markets appear to be climbing a “wall of worry” to start the year. Meanwhile, sector action over the last week continues to indicate some rotation away from defensive sectors like Drugs, Utilities and Food & Beverages, and toward cyclical sectors like Automotive, Retail, Software and Construction.
There are still a number of announcements with the potential to move the markets before the weekend. After the close today, results are due from Apple, Alphabet and Amazon.com, followed tomorrow morning by US Nonfarm Payrolls and Service PMI numbers from around the world. Wage inflation numbers may also be of interest with the Fed continuing to raise interest rates. Canadian job numbers aren’t out until next Friday and for the most part, next week is relatively quiet for economic news.
We continue to move through the peak of earnings season on both sides of the border next week with results on the way from companies across a wide spectrum of sectors which could in aggregate, give a good picture of the state of the economy. Headliners include DuPont on Tuesday; Disney, Sun Life, and Great West on Wednesday, and Warner Bros, Pepsico, Expedia, Thomson Reuters, Canada Goose, Canopy Growth, Bombardier, Telus and others next Thursday.
In this edition of the Equity Leaders Weekly, we investigate what recent action in transportation and small cap stocks is telling us about the breadth of the current equity market rally.
Dow Jones Transportation Average (DTX.I)
In last week’s edition of the Equity Leaders Weekly we highlighted a bullish Head and Shoulders base and a Golden Cross in the S&P 500 (SPX.I), along with a breakout by the semiconductor sector. It is important to note that the current market recovery is not just a trading bounce by the depressed technology and communications sectors. The current advance is much broader and bigger than that, and is being led by cyclical groups like homebuilders, who we highlighted in the January 12th issue of Equity Leaders Weekly and transportation stocks.
Dow Theory, which dates back over a century, tells us that moves in transportation stocks (who move goods and people to market) should confirm moves in industrial stocks (producers of goods and services) as the economy expands and contracts.
Recent trading in the Dow Jones Transportation Average (DTX.I) confirms recent strength in broader indices like the S&P 500. A recovery trend in DTX.I, which started back in October, has accelerated in the last month with the index completing bullish Double Top and Spread Double Top breakouts, snapping a downtrend line and building a bullish High Pole. Previous column highs and lows suggest potential resistance near 1558 then 1606 on trend with initial support possible near 1454 based on a 3-box reversal.
Investors should also note that recent weakness in the Dow Jones Utilities average including a recent bearish Double Bottom breakdown is indicative of capital leaving traditionally defensive or value sectors as investor confidence improves.
Russell 2000 Index (RLS.I)
When trying to determine the strength of a market move, investor often look at the amount of participation across geographies, sectors and company size, also known as breadth. A wide variety of stocks participating in a move is seen as being stronger and more sustainable than a move concentrated in a few stocks or sectors.
The Russell 2000 Index (RLS.I) widely seen as the benchmark for small cap stocks, staged a major breakout yesterday to kick off February. By climbing back above 1,900 to its highest level since September, RLS.I has completed a bullish Spread Quadruple Top breakout, signaling that it has completed base building and that a new uptrend has commenced.
In addition to the 2000 round number, previous column highs suggest potential resistance tests may appear near 2,028, 2,069, or 2,132 on trend. Initial support appears near 1836 based on a 3-box reversal.
Gains by small cap stocks, emerging markets, and cryptocurrencies, since the start of this year also indicate an increased risk appetite among investors, a sign of increasing confidence.
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