DOW INDUSTRIALS AND TRANSPORTS ARE FINALLY IN SYNC -- TRANSPORTATION RALLY INCLUDES AIR FREIGHT, RAILS, AND TRUCKERS -- COPPER UPTREND ACCELERATES AS FREEPORT MCMORAN NEARS BULLISH BREAKOUT -- CYCLICAL STOCKS OUTPACE STAPLES
DOW THEORY LOOKS STRONG... Chart 1 shows the Dow Industrials trading at a new record high today. That's a positive sign. But so is the fact that the Dow Transports achieved a bullish breakout on Monday. That puts both Dow Averages in sync on the upside for the first time in nearly two years. Chart 2 shows the Dow Transports rising to the highest level in eighteen months. It's still well off its early 2015 high, but it is now in an uptrend. In fact, it's rising faster than the industrials. The TRAN/INDU ratio (top of Chart 2) is on the verge of an upside breakout of its own. That's a sign that the transports are starting to play catch-up. The transportation rally is also broadening out to include more groups.
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Chart 1
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Chart 2
AIR FREIGHT, RAILS, AND TRUCKERS ARE ALSO IN UPTRENDS... I recently showed the Dow Jones Airline Index rallying to a seven month high. Other transportation groups are doing even better. Chart 3 shows the Dow Jones Railroad Index reaching the highest level in more than a year. Chart 4 shows the Dow Jones Trucking Index at a new record. Chart 5 shows the Dow Jones Delivery Services Index also in record territory. Those indexes show a lot of power behind the transportation rally. That's also a sign of a stronger economy. Someone has to buy the goods that the transports are moving and delivering. That's the whole premise behind the Dow Theory. Industrial companies make the goods that consumers want, while the transports move them to market. That's why it's a good sign when both groups of stocks are moving up together like they are now.
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Chart 3
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Chart 4
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Chart 5
COPPER SURGE CONTINUES... I've written several recent messages on the resurgence of industrial metals like aluminum, copper, and steel, and stocks tied to them. That rally has gotten an additional boost from the Trump victory on Tuesday. Expectations for big infrastructure spending has pushed metals tied to construction even higher. Chart 6 shows the price of copper completing a major basing pattern earlier this month. The price of copper jumped 4% today which is the biggest one-day gain in three years. That also puts the price at the highest level in sixteen months. That's obviously giving a big lift to stocks tied to copper. Chart 7 shows Freeport McMoran (FCX) challenging a flat "neckline" drawn over its late 2015 - spring 2016 highs. An upside breakout appears imminent. Stocks tied to steel are also rising strongly for the same reasons. Chart 8 shows Nucor (NUE) trading at a new eight-year high. Those stocks are giving a big lift to the basic materials sector.
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Chart 6
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Chart 7
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Chart 8
ROTATION FROM GROWTH TO VALUE... This week's market reaction to the Trump victory shows a number of significant sector rotations going on. One of the more obvious is the continued selling of dividend-paying stocks like utilities and REITs and buying into economically-sensitive groups like financials, materials, and industrials tied to construction and defense. Still another is a continuing move out of defensive consumer staples into more economically-sensitive cyclical groups like retailers. Chart 9 shows a ratio of the Consumer Cyclicals SPDR (XLY) divided by the Consumer Staples SPDR (XLP) breaking out to a new high for the year. Another rotation in process is a move out of growth stocks into value. Chart 10 shows the relative strength ratio of the S&P 500 Value iShares (IVE) divided by the S&P 500 Growth iShares (IVW). The ratio has risen this week to the highest level in nearly two years. And that may explain some puzzling moves in today's trading. Technology is the biggest part (34%) of the growth ETF, while financials (24%), energy (13%), healthcare (12%) and industrials (11%) make up the bulk of the value ETF. That may explain why technology stocks are in the red today, while most economically-sensitive groups are in the black. Investors appear to be moving into former underperforming groups like financials, healthcare, and transports that should do better under the new administration. They also appear to be selling some of their technology winnings to do that.
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Chart 9
