What the 118-year-old 'Dow Theory' says about today's market

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From Ben Morris and Drew McConnell, Editors, DailyWealth Trader:
Every good run comes to an end…
Yesterday, the Dow Jones Transportation Average, the “Transports,” ended one of its best runs of the last 30 years.
It started 2018 by climbing higher for nine straight days.
Stock market commentators often say that price action at the start of the year carries weight for the rest of the year. So, we decided to put this streak to the test.
The results were impressive. Today, we’ll show you why we’ll likely see more gains for the Transports and the entire stock market this year.
Before we get to the numbers, we want to remind you why we pay attention to the Transports…
In October, we explained that analysts often use them as a “leading indicator.” Transports include shipping companies, airlines, and railways – businesses that touch almost every part of the economy…
Shipping companies like FedEx (FDX) and UPS (UPS) deliver products around the world. When these companies are doing well, it shows that people are spending more on things like electronics and clothes. This is a good sign for manufacturers and retailers.
Major airlines like United Continental (UAL), Delta (DAL), and American (AAL) carry travelers and businesspeople around the world. When these companies are doing well, it’s a good sign for hotel operators and resorts.
Railways like Union Pacific (UNP) and Norfolk Southern (NSC) haul everything from commodities – like coal and steel – to fully assembled cars. These companies benefit when people, businesses, and governments are spending on new homes, energy, and infrastructure.
When the Transports are strong, it’s a good sign for the economy.
As you can see below, the Transports broke out to a new high in late November and haven’t looked back…
0117-tran_mb2os5rct0-1
In the past 30 years, the Transports have never started the year with a nine-day rally. So for our test, we looked at what followed past start-of-year Transport rallies that lasted two days or more.
You can see the results in the table below. It shows the year, the length of the streak, and the one-year returns for both the Transports and the market benchmark S&P 500 Index (starting on the close of the final day of the streak). Below the table are the average and median returns for the eight prior occurrences…
012318-crux-table-1
As you can see, both the Transports and the general market were higher one year later every time. And the Transports were at least 7% higher one year after these start-of-year streaks.
The performance in this leading indicator suggests the bull market in stocks is still intact – and should continue throughout the year.
Regards,
Ben Morris and Drew McConnell

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