This is the Sector to Watch Right Now
Stocks are lurking just beneath their all-time highs as I write this.
The S&P 500 has broken its all-time high on an intraday basis. But we’ve yet to get a new closing high.
Given how close we are, I would be greatly surprised if traders didn’t push for a new all-time high on a closing basis this week.
However, underneath this, we’re seeing significant rotation occur.
Rotation occurs when capital begins to move en masse from one sector to another. Typically, this involves money shifting from a sector that has been leading to one that has been lagging.
In our recent market climate, this means money shifting out of tech stocks and into transports. The chart below shows the ratio of the Dow Jones Transportation Index (a basket of economically sensitive stocks) relative to the NASDAQ (a basket of tech stocks).
Put another way, when the Dow Jones Transportation Index outperforms the NASDAQ, this line rises. And when the Dow Jones Transportation Index underperforms the NASDAQ, this line falls.
The NASDAQ has outperformed the Dow Jones Transportation Index dramatically this year (as you can see, from January through mid-May, the line was falling and trending down). However, this ratio recently hit on a level that typically precedes a bounce (that green line at 0.86). Since that time, as indicated by the line rising, we’ve seen rotation occur as the Dow Jones Transportation Index begins to outperform the NASDAQ.
Is this the start of something major?
We need to see this ratio break above resistance (the red line at 1.01). If it does, then we will begin to see Transports REALLY outperform Tech.
This is one of the key developments I’m watching for. Put it on your radar. A lot of transportation and economically sensitive companies have been lagging dramatically since the March bottom. It might finally be their chance to shine!
Editor, Money & Crisis