by Michael Tarsala, CMT
This week’s stock buying binge that sent the S&P 500 to multi-year highs also kept the transportation index from reaching new multi-year lows.
That’s huge news!
For now, it helps to set aside what to me would have been a sign that the stock market rally was ready to roll over.
Transportation stocks matter. The amount of stuff shipped -- and the profits derived from it -- gives us important insights into the economy’s strength. That’s why the recent news out of UPS and FedEx have been so disappointing, and a potentially bad sign for the economy and perhaps the stock market.
You want to see transportation stocks confirming a market uptrend. That goes all the way back to Dow Theory. Stocks of companies that ship goods should be moving higher along with those that make goods. When they are not, it can help mark a rally's end point.
The Dow Transportation Index ($TRAN), above, has been moving pretty much sideways since February while the S&P 500 has recently broken out to highs not seen since 2008. That alone could spell trouble.
What really would have been awful news, though, is if the Dow Transportation Index actually broke lower out of that sideways trend. That nearly happened this week. Thankfully, the ECB bond-buying program that sent the S&P 500 surging also kept transports from breaking down.
This is still an uneasy stock rally in my mind, fueled by foreign stimulus and election year hopes.
A breakdown of those transport stocks, though, could easily have changed the current mood of cautious optimism to pessimism.
That’s why to me, the biggest market news all week was the transport stocks breakdown that never happened.