Here's How to Play the Post-Election Market Madness
The presidential election has derailed the carefully-laid plans of countless investors.
While most folks have allowed the howling media to distract them from their investing goals, we have consistently approached the market with an objective eye.
And what we’ve found over the past week is nothing short of startling:
Many of the major market trends that were setting up at the beginning of the fourth quarter remain intact.
While the election has served its purpose as an entertaining circus sideshow, the main event of 2016 won’t occur in Washington, D.C. The spotlight is turning to Wall Street right now—and a powerful year-end rally that has slowly simmered under the radar of investors and the financial media since early October.
At the start of the fourth quarter, we listed the new bricks piling on top of the Wall of Worry: Brexit negotiations. Deutsche Bank woes. The presidential election.
It was enough hot air to distract even the most serious investor.
Despite the noise, one group of stocks hinted that all was not lost as volatility roared back to life. Even though the world was supposedly falling apart, transportation stocks marched higher.
Here’s how it all went down…
After the Brexit bottom in late June, the Dow Jones Transportation Average was one of the down and out sectors that started to outperform the major averages. Transportation stocks like airlines and railroads had lagged their industrial cousins for most of the year. But as the market bottomed out, these sickly stocks began to actually outperform in a major way.
When we last check in with the Dow Jones Transportation Average at the beginning of October, it had doubled up the Dow industrials since the Brexit Bottom. The transports were within spitting distance of a huge breakout.
We told you that if the transports continued higher, these beaten-down stocks would completely wipe out losses of nearly 30% and trigger one of the oldest bull market indicators on the books.
That’s exactly what happened…
Remember, transports endured an actual bear market as the major averages chopped along for the past two years. And these stocks play a key role in measuring market moods. This is where a market timing tool called Dow Theory comes into play. 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.
We noted a Dow Theory sell signal triggered last summer as the late August market swoon sent the industrials crashing through their February lows. The industrials confirmed the move lower in the transports, telling us it was time to get cautious.
By January, the transports had sunk into bear market territory. The sector had dropped nearly 30% in a little over a year. That’s where these stocks finally bottomed out.
After tracking the industrials for most of the year, the transports have now broken out. The move happened early last week—before the election—vaulting the average to new 2016 highs.
The post-election rally surprised most market watchers. But the transports gave us advance notice that the market would be just fine.
Stocks don’t give a rip that Donald Trump was elected president. Now we have a Dow Theory buy signal telling us to get bullish. Stock are ready for an end-of-year melt-up.