Transports are Bottoming-- Here’s How to Trade the Next Move Higher

Rock. Bottom.

No, I’m not referring to your love life. I’m talking about transportation stocks…

These suckers have dragged down the entire market for months. It’s been a tale of two Dows. The Dow Jones Transportation Average has dropped more than 8% on the year. But the Dow Jones Industrial Average has just about broken even over the same period. That shows you just how bad the trannies have been.

But there’s a bigger reason folks are keeping a close eye on airline, rail, and freight stocks these days. And today, I’m going to show you how you can actually trade these sad sacks for some big gains. Don’t believe me? You will soon enough…

Why have these stocks received all this negative attention lately—and what it could mean for this aging bull market?

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. And because the transports have spent this year in the outhouse, some market watchers are prepping for a big sell signal.

“The Transports are looking ugly this year,” I told you earlier this month. “After peaking in December, the trannies are down about 11%. But the Industrials? They’re holding up just fine… for now.”

Here’s an updated visual tale of two Dow’s:

According to Dow Theory, with the industrials still in positive territory, we’re still in “buy” mode. And let’s be honest, that’s not a terrible place to be. But what about those leaky transports? Well, it looks like they might be forming a bottom here.

What does all this mean?

For starters, it looks like we’re seeing a bit of rotation in the markets right now. Stocks are bouncing. But some of the stronger names that have propelled the market higher during the first half of the year are taking a back seat to weaker names.

The transports are a perfect example. Traders have clubbed these transportation stocks to death since they peaked late last year. But that’s all changing now.

So far this week, the Dow Jones Transportation Average is up a thumping 4.25%. That’s a huge move in just four trading days.

More importantly, this thrust higher is helping transports break above resistance that’s been dogging these stocks for the better part of six months.

Greg Guenthner

for The Daily Reckoning

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