Industrials or Transports—Who's Leading?

09/02/2013 6:00 am EST

Focus: STOCKS

Thomas Aspray

, Professional Trader & Analyst

Deterioration in the technical studies has been evident over the past few weeks, and MoneyShow’s Tom Aspray examines which sector could lead the next rally into year end.

The seasonal chart I discussed in June suggested that July could be a better month for stocks than June when the Dow Jones Industrial Average was down 2.9%. The powerful rally in July caught many by surprise as it was not the summer doldrums many were expecting.

The Dow Industrials were up 3.9% in July while the Dow Transports did even better as they were up 4.6%. The evidence at the end of the month and the typical seasonal pattern suggested that stocks were unlikely to sizzle in August.

With just one day left in the month, the Dow Industrials are down 3.8% in August while the Dow Transportations is just down 2.4%. So which average is likely to lead once the current market decline is over?

chart
Click to Enlarge

Chart Analysis: The left side of the chart looks at the % gain in the Dow Industrials and the Dow Transports since the market bottom in March 2009.

  • Since March 2009, the Transports have been considerably stronger, gaining 153%.

  • This is 43% better than the 110% gain in the Industrials.

  • Between April of 2011 and September of 2011, the Dow Transports went from up 120%, to just up 60%.

  • In 2012, the Transports were a bit weaker than the Industrials as it was up just over 5% while the Industrials gained 7.2%.

So what about 2013?

  • The Transports are also leading this year by 3.8%.

  • The Transports are up 14.3% while the Industrials are up about 10.5%.

  • Both are lagging the Spyder Trust (SPY), which is up just over 15%, so far, this year.

  • At the high in early August, the SPY was up 20% for the year.

chart
Click to Enlarge

The weekly chart of the iShares Transportation Average (IYT) shows that it made a new closing high on Friday August 2 at $118.94, which corresponds to a closing high in the Transports of 6651.

  • The same week, the Dow Industrials made a new weekly closing high at 15,658.

  • The fact that both averages made new weekly closing highs confirms the major positive trend.

  • The relative performance on IYT is still locked in is trading range, indicating that it is keeping pace with the S&P 500 but not leading it.

  • A drop in the RS line below the support at line b would be a sign of weakness.

  • The weekly OBV did confirm the August highs but is now just barely above the uptrend, line c, and its WMA.

  • There is next good chart support at $111.70 and then $110.53, which is the quarterly pivot.

  • There is further support at the June low of $106.23, which also corresponds to the 38.2% Fibonacci retracement support.

  • The more important 50% support level is at $102.60.

  • The 38.2% support level for the Dow Industrials is at 14,442 and at 5985 for the Dow Transports.

What It Means: It will be important to watch how both averages act if the market continues to move lower into September. I would expect the Transports to once again lead the market during the rally that typically occurs in the last few months of the year.

The relative performance of the Dow Industrials and the SPDR Dow Jones Industrial average has been acting weaker than the S&P 500 since early July when it broke important weekly support. The quarterly pivot support for DIA at $149.25 was broken last week.

How to Profit: No new recommendation

Portfolio Update: For the iShares Dow Jones Transportations (IYT), the 50% long position from $110.18 and 50% long at $109.42 were both stopped out last Wednesday at $112.38.

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