On February 12, the Dow Jones Transportation Index generated a short-term buy signal. We think the turn in the transportation Index represents a bottom in the broad market, and expect higher prices in the major indices in the immediate term. Divergences have not only occurred in the Dow Transportation Index, but also in the S&P 400 mid-cap, Dow Jones Industrial Average New York Composite Index and the VIX.
Below, we go into greater detail about divergences that have been occurring at a time of extreme bearishness. Typically, markets tend to reverse when bearish sentiment reaches extremes. Although, the NASDAQ 100, S&P 500, DJIA, New York Composite Index Dow and Russell 2000 have not yet generated short-term buy signals, we think this is only a matter of time.
The Dow Jones Transportation Index made its low of 6403.31 on January 20, which is the lowest print since 6401.51 made during the month of October 2013 and rallied to the high of 7100.31 on February 10. The transportation Index made its all-time high during November 2014 when it printed 9310.22. The decline of the transportation index from its all-time high has been spectacular, especially when compared to the major indices.
On January 20, the transportation Index began to rally even as the S&P 500 E-mini (and other indices) rallied temporarily then reversed and the E-mini penetrated the January 20 low of 1804.25 to make a new contract low of 1802.50 on February 11. Despite recent weakness in the major indices, the transport index never got close to its January 20 low and has shown rock solid support during recent broad market weakness.
From January 20 through February 12, the transportation Index has advanced 6.39% compared to the S&P 500’s paltry gain of 0.29% in this time frame. The performance of the 20 stocks that comprise the Dow Jones Transportation Index have performed surprisingly well since the January 20 low.
From January 20 through February 12, there are only 3 stocks out of 20 in the minus column. This group is composed of airlines: AAL (-3.17%) DAL (-5.91%) LUV (-7.79).
Stocks that out performed the S&P 500 (+.029%), but under performed the transportation Index from January 20 through February 12 (+6.39%) include: EXPD +5.59%, UNP +4.88%, CAR +4.50%, FDX +4.40% JBLU +2.02%, NSC+1.94%, ALK +1.91%.
Stocks that outperformed the transportation index and S&P 500 from January 20 through February 12 include KSU +23.39%, JBHT +13.25%, R +12.04%, CHRW +10.09%, UPS +9.64%, KEX +9.59%, CSX +8.52%, UAL +7.16%, LSTR+7.07%.
Additionally, though the advance has been relatively tame compared to the transportation Index, the S&P 400 mid-cap index has rallied to close 3.85% above the January 20 low of 1215.12. The mid-cap index never penetrated the January 20 low contrary to the S&P 500, NASDAQ 100 and Russell 2000.
New York Composite:
The New York Composite Index followed the pattern of the S&P 400 and did not penetrate its January 20 low of 8937.99 on February 11 even as the Russell 2000, NASDAQ 100 and S&P 500 made new lows. As of Friday’s close, the New York composite index closed 3.26% above the January 20 low.
Remarkably, the Dow Jones Industrial Average never took out its August 24 low of 15,370.33. Each major low since August 24 has been slightly higher. On January 20 the DJIA made a low of 15,450.56 and the low of February 11 was 15,503.01. As of Friday, the index closed at 3.93% above the August 24 low.
The cash volatility index VIX has been showing a pattern of lower highs even as many indices have been trading to lower levels. For example, on August 24, the cash VIX Index spiked to the high of 38.06, then made a lower high of 33.82 on September 1. On January 20, when major lows were made in most indices, the reading for the VIX was 32.09, lower than the August 24 and September 1 prints.
As the S&P 500, Russell 2000 and NASDAQ 100 made new lows on February 11, the VIX reached 30.90, approximately 4% below the January 20 high print of 32.09 and 19% below the August 24 high.
In short, the fear gauge is beginning to show that fear is decreasing. In our view, this is additional confirmation the worst is over for now and that higher prices for the major indices lay just ahead.