Transports Surpass April High

10/10/2016


Helped by strength in the railroad and airfreight groups, the Dow Transports closed above the April high of 8,109.19. The Dow Industrials, hurt by weakness in such defensive names as Coca-Cola ($42; KO) and McDonald's ($113; MCD), are trading about 2% below their Aug. 15 all-time high of 18,636.05.

A near-term breakout to new highs in the Industrials would be encouraging. But both averages are now in uptrends, suggesting the primary trend is bullish under the Dow Theory. Reflecting this week's upgrades, our Buy List and Focus List now have 87.6% in stocks, while our Long-Term Buy List has 83.6%. As we see opportunities, our equity exposure will likely increase.

Industry-group rotation

At the risk of stating the obvious, industry-group rotations can go one of three ways. If previous leaders can at least move sideways as new leaders emerge, market averages tend to move higher — and often stage breakouts. If most groups lose altitude, the averages tend to slump. And if gainers and losers basically offset, a trading range develops.

The trading range of 2015 and 2016 has been one for the record books. The large-company S&P 500 Index has gained about 5% since year-end 2014, and the index has never been more than 8% from 2,027 since October 2014.

Beneath the surface, the index has seen some wide swings in industry-group performance, including a surge in the first half of 2016 in such low-volatility sectors as utilities, telecom, and consumer staples.

Reflecting valuation worries and an uptick in bond yields, these bond-like sectors have slumped recently. All three have dropped more than 4% since June 30. The utility sector, seen as the most bond-like of sectors, has declined more than 10%.

Meanwhile, the energy, financial, industrials, and technology sectors — all of which tend to benefit from a stronger global economy — have gained more than 3.5% since June 30. The airfreight and railroad groups — seen as barometers of the outlook for global trade — have rallied more than 5%.

Stocks with high Quadrix Value scores, which tend to do best when expectations for the economy are improving, have outperformed in three consecutive one-month periods. Stocks with the highest dividend yields have underperformed in three straight months, as have stocks with the lowest volatility.

Conclusion

While a breakout in the S&P 500 and Dow Industrials would be encouraging, the move to significant highs in the Transports is reason enough to lift our equity exposure. Top buys include Lear ($124; LEA) and Zions Bancorp ($32; ZION).


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