Last week, the S&P 500 rallied 2.8% for its best week of 2016. There is a general sense this is a pause and not a turn, so this week will be a major test. If momentum is to maintain, there are certain areas that must participate, including transportation. I have long been a fan of the Dow Theory, where one tenant is that transportation stocks must be higher to give market rallies legitimacy.
The Dow Jones Transportation Index (DJTI) turned in early January and has picked up even more momentum. Still, the index has its challenges, including truckers and railroads. Airlines in the index took off as crude broke under $30 a barrel again. In fact, most of the stocks traded the way one would expect with the exception of Kansas City Southern (KSU) that upgraded at Credit Suisse. When Trinity Industries (TRN) crashed, I was sure rails would all collapse in unison.
Trinity isn’t a bellwether; the magnitude of its sell-off should have had implications for rails. For years, I loved Kansas City Southern (made money each time we built a position in 2006, 2009, 2012, and 2014 when we last sold on October 1, 2014 at $117). Before the new Panama Canal opens, we want to get back long, but its strong session (Union Pacific higher, too) is encouraging as a proxy on the U.S. economy now. For now, the DJT has to find a way to close above 7,500.
This Week’s Highlights
It’s going to be an interesting week marked by an avalanche of Federal Reserve speakers that could either:
- A) Corroborate no rate hike in March
- B) Or make things more confusing
We also get a bunch of data on housing, which continues to come up short despite historically low rates. The lack of supply excuse has worn thin; it’s time to see a real and consistent traction. We also have the pulse of consumers; in addition to surveys, we get income, spending, and savings data.
Once again, the Dow faces a big challenge to climb through 16,500 and the Street will not wait long for that to happen.
The oil-stocks relationship is fading a bit, but oil stocks could help in a rally attempt. Watch for SPDR Select Sector Fund (XLE) to climb above 58, then breakout on a closing basis above 60.