With so much at stake in the U.S. right now - upcoming contentious elections, an open Supreme Court seat, another round of stimulus and relief bills, and an exhausted but still active Federal Reserve - one shining sector could be key to where the market goes from here.
First, a bit of history. Way back in the day, Charles Dow put into place two indexes - the Dow Jones Industrial Average and the Dow Jones Transportation Index. The industrial average represented (and still does but limited to 30 blue-chip stocks), the industrial or manufacturing complex or supply side of the economy. The transportation index (mainly freight back then) represented, and still does, the movement of goods or the demand side of the economy.
“One shining sector could be key to where the market goes from here”
The traditional understanding of the Industrial Revolution was that manufacturing created advanced economies and raised the standard of living. However, the instrument of dynamism flipped with the advent of the Information Age. Since 2012, the technology and semiconductor sector has reigned supreme in the markets as technology has changed almost every other industry and sector.
While consumption spending represents about 56% of the GDP, that spending is divided among durable, non-durable goods and services. Tech has made its way into all those segments as food, clothing and many services and supply chains have been modernized through the use of technology. And that has increased exponentially in the COVID age.
Nonetheless, the supply side is only half of the equation. The demand side tells us whether consumers want and are buying goods and services, hence a reliable indicator to predict not only the potential growth of the economy, but also the potential rise in the overall stock market.
Using a technical analysis-based navigation system, I measure the overall breadth of the market in several ways. One of those ways is through market phases. I use six. Those phases are calculated by using price relative to two simple moving averages. Everyone is aware of a bullish and bearish phase. It is the four in-between phases that interest me most. In the last couple of weeks, all the key market indices and sectors have deteriorated in phases, from bullish to caution or distribution. Simply put, that means the price of the instrument trades below its 50 and/or 200 daily moving average.
The holdout? Transportation. The ETF IYT remains steadfast in a bullish phase. This is the first time in a long while that IYT has taken the lead, even over the tech sector and NASDAQ 100.
“The ETF IYT remains steadfast in a bullish phase”
This intrigues me. With all the doom and gloom, this new leadership mirrors the surge in online consumer spending where goods, once ordered, have to leave a store, warehouse, or distribution center and get delivered through trucks, freight, air and shipping.
As a consumer-based economy, shopping habits have changed from brick and mortar to online. The good news is that folks are still buying. Some of the money is going towards essentials. Yet, durable goods, led by machinery, rose slightly in the US in August by 0.4%.
The ETF IYT has 22 stocks in its basket. The most heavily weighted company is FedEx. The stock FDX trades on new multi-year highs, with all-time highs made in January 2018 at $274.66 per share.
With 55.5% of IYT comprised of ground freight, I see FedEx’s outperformance along with the ETF itself as the best news going forward not only for a potential economic recovery, but also for a potential market bounce.
Should this trend continue, we are looking for opportunities in some of the other areas of IYT’s basket such as in airlines (16.6% of the basket) and passenger transportation, ground, and sea.
Michele 'Mish' Schneider currently serves as Director of Trading Research and Education at MarketGauge.com. She writes and produces daily market analysis in "Mish's Daily", and serves as a developer and trading mentor in several of our trading services, drawing on her 30+ Years of Trading and Teaching Experience.
Mish is a former floor trader on several New York Commodity Exchanges, including Coffee, Sugar and Cocoa, NYMEX and FINEX in NYC. While on the trading floor Mish also served as a market analyst for two of the largest commodity trading firms at the time - Continental Grain, and Conti-Commodities.
Mish also wrote the best-selling finance book, Plant Your Money Tree; A Guide To Growing Your Wealth.