Dow Transport Rally Points to Bull Run: Strategist

Much of the attention has been on the S&P 500 Index hitting new highs, but what is giving some investors more confidence that the bull run will continue unabated is the performance of the Dow Transportation Average Index. It has been gaining in the past five days, which Matt Maley, an equity strategist at Miller Tabak said is a good sign that more upside in stocks will come.

"We still need the Dow Jones Industrial Average to break to new highs to give us a confirmation of a buy signal on the Dow theory. But obviously, with the transportation index being such an economically sensitive one, this break to new highs could be positive," Maley said on CNBC’s “Trading Nation,” this week.  

Dow Theory Needs Both Indexes to Move Higher

According to CNBC, the long held Dow theory goes like this: When the Dow Transportation Average and the Dow Industrial Average sets new highs in lockstep or around the same time it means stocks are poised to go higher. The idea noted CNBC is that transports deliver the products companies around the globe are producing so the indexes should move together. On Tuesday, the Dow Transportation Index reached an all-time high, marking the first new high since the middle of January. Meanwhile, CNBC noted the DJIA needs to climb another 3% to set a new high. (See also: Dow Theory and the Primary Trend.)

Airline Stocks Next to Rally?

The way Maley sees it, while the DJIA catches up to the Dow Transportation Average, airline stocks could boost the latter. Maley said airline stocks took a hit in the first half of 2018 and are now poised to regain losses. "If they can break above their highs from just a few months ago, it will give it a key higher high and give it a lot more upside momentum, and that in turn could take the rest of the sector higher," Maley told CNBC. (See also: Rotation Into Airlines Sends Transports Higher.)  

Still, not everyone is convinced that an increase in airline stocks will support the Dow theory. Gina Sanchez, CEO at Chantico Global, told CNBC she thinks a surge in airline stocks will be prompted by declining oil prices given the group is very sensitive to jet fuel prices. “If you have oil prices falling, that's a great thing. That makes airlines significantly more profitable, so I'm not sure it's telling us anything about the economy," said Sanchez.

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