In this article, Mish Schneider explores oil’s recent performance and to what extent this, alongside tracking the transportation sector, can indicate the direction and pace of market recovery.
Oil [USO] has blasted off with the rest of the market in the last five trading days. That is after it cleared the key 50-week moving average four weeks ago.
This bodes well for the market and economy for now, as oil signifies an economic recovery is on the way.
Since oil has a direct impact on the transportation sector [IYT], that too was able to break back over its 50-day moving average last week.
We have been watching IYT as an indicator for market demand, with strength showing a healthy movement of goods.
By watching both oil and transportation we can better keep track of the long-term picture for market recovery.
Though IYT is holding over an important moving average, the volume has been low and the movement small.
Comparatively, all four major indices have broken new all-time highs on Monday.
If IYT continues to trade sideways and the rest of the market continues upward, it would show stagnation in price movement and ultimately serve as a sobering reminder that the market is running too far ahead of itself.
With oil moving upward, the notion that inflation is also moving up could become worrisome, especially if the transportation sector does not follow.
This scenario could lead to an inflationary period as prices of goods increase while their demand goes down.
With that said, these things can take time to play out and it does not mean we should be running for the exits if they happen.
Some sideways consolidative price action might even be healthy, as the US Federal Reserve begins to rollout more stimulus money.
This article was originally published on MarketGauge. With over 100 years of combined market experience, MarketGauge's experts provide strategic information to help you achieve your investing goals.