Are These Stocks About to Confirm a Roaring Bull Market?

One of last year’s worst performing averages is running wild…

If it continues higher at this pace, this beaten-down group of stocks will completely wipe out losses of nearly 30% and trigger one of the oldest bull market indicators on the books.

Even better, this incredible comeback could also put double-digit gains in your pocket in a matter of weeks.

Let me explain…

After the Brexit fakeout, the Dow Jones Transportation Average was one of those down and out groups that started to power higher. Transportation stocks like airlines had been absolute dogs for weeks. But as the market bottomed out, these sickly stocks began to actually outperform the major averages by a country mile.

TransportsDominate-DR

The transports are higher by more than 13% off the Brexit bottom, while the Dow Jones Industrial Average is up a little less than 8% over the same timeframe. That’s a huge performance gap that tells a big story about the markets right now.

When it comes to measuring market moods, the Dow Jones Industrial Average and the Dow Jones Transportation Average have a proven record of accuracy. Here’s a little history for you…

One of the main culprits dragging down the market during the first half of 2015 was the transports. The broader market started breaking down last August. But the Dow Jones Transportation Average had already dropped more than 8% during the first six months of the year. The Dow Jones Industrial Average was sitting at breakeven over the same period.

At the time, we were keeping a close eye on airline, rail, and freight stocks. Why? It all starts with a market timing tool called Dow Theory. 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.

But because the transports had spent the year in the outhouse, we were prepping for a big sell signal last year.

Then the late August market swoon sent the industrials crashing through their February lows. The industrials confirmed the move lower in the transports. That was our Dow Theory sell signal.

We become a lot more cautious. And the signal was right! Just look at how the market behaved for the next 10 months…

At the start of December, the transports broke lower again. And they continued to lead the market lower into January. In a little over a year this maligned sector had dropped nearly 30%.

You already know that the major averages have reversed off their February lows. We’ve seen a healthy rotation into some of the more beaten-down sectors like mining and materials stocks while some of the stronger names that propelled the market higher last year are taking a back seat.

As the major averages post new highs, the beaten down groups such as small-caps and transports are staging remarkable comebacks. These forgotten stocks are ripping higher virtually unnoticed, giving alert traders the opportunity to book fast gains.

Please understand: Dow Theory doesn’t ever tell us what individual stocks are going to beat the market or anything like that. It only spits out one of two “big picture” signals: buy or sell.

And right now, transports haven’t given us a long-term “buy” signal yet. That’s OK—Dow Theory is a long-term signal that can be incredibly slow. By design, it’s going to miss the first chunk of any major rally.

But it would be foolish for us to ignore this rally. Several beaten down stocks and sectors have offered us monster trading opportunities recently as they snap back to life…

If other transportation stocks can break out of their funks (and above resistance) we could have some powerful short-term trades on our hands.

I’ll keep you posted…

Sincerely,

Greg Guenthner
for The Daily Reckoning

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