The fourth quarter is upon us.
It’s time for the market to show us what it’s got! Is a powerful year-end rally in the works? Or will our turbulent world derail the positive momentum building under the surface of the major averages?
Plenty of new bricks are piling on top of the Wall of Worry as we enter 2016’s home stretch. Brexit negotiations. Deutsche Bank woes. Two more presidential clown shows before the November election. That’s enough hot air to distract even the most serious investor.
Despite record levels of noise out there, we’ve found one group of stocks that’s about to trigger a massive rally.
I’m talking about transportation stocks.
After the Brexit bottom in June, the Dow Jones Transportation Average was one of those down and out groups that started to power higher. Transportation stocks like airlines and railroads had lagged the major averages for most of the year. But as the market bottomed out, these sickly stocks began to actually outperform the averages in a major way.
Since late June, the Dow Jones Transportation Average has risen nearly 14%, compared to a nearly 7% rise in the Dow Jones Industrial Average. Now that the transports have doubled-up the industrials, they’re finally within spitting distance of a huge breakout.
Friday’s surge puts the transports a breath from their April highs. One more shove in the right direction and this group will officially break out of its downtrend and set the stage for a run toward its 2015 highs.
But it gets even better…
If transports continue higher at their current pace, these beaten-down stocks will completely wipe out losses of nearly 30% and trigger one of the oldest bull market indicators on the books.
Remember, transports have endured an actual bear market as the major averages have chopped along for the past two years. And these stocks play a key role in measuring market moods. This is where a market timing tool called Dow Theory comes into play. Dow Theory uses two indexes to measure the market’s primary trend: The Dow Jones Industrial Average and the Dow Jones Transportation Average.
The idea is that the two groups combined can measure the overall health of the economy. If the industrials are performing well along with the transports, we can assume goods are being made and delivered. In other words, the economy is humming along.
We noted a Dow Theory sell signal triggered last summer as the late August market swoon sent the industrials crashing through their February lows. The industrials confirmed the move lower in the transports, telling us it was time to get cautious.
At the start of December, the transports broke lower again. And they continued to lead the market lower into January. The sector had dropped nearly 30% in a little over a year.
It’s no secret that stocks have reversed off their February lows. As the major averages jetted to new highs in August, beaten down groups like the transports finally began to post remarkable comebacks.
Last month, you were able to hop onboard airlines as they first began to take off. Now, rails are powering to new 52-week highs. These stocks have survived the September volatility surge and are moving in the right direction again.
The train’s leaving the station—hop onboard while you can!
This story originally appeared in the Daily Reckoning