Green line = 200 day moving average

DJT Daily Chart                                       Source: Bloomberg, PSR

The risk-on sentiment is back in full force once again with the small-cap stocks leading the way. Since May, the Russell 2000 index had broken multiple new record highs and advanced 3.8% above the January prior record high. Most of the main equity indices have also resumed their uptrend with the Dow Jones Industrial Average (DJIA) being the laggard. The closest proxy to the DJIA is the Dow Jones Transportation Average (DJT). The DJT is a price-weighted average of 20 US transportation stocks. Some of the better-known names are FedEx Corp, Union Pacific Corp, and United Parcel Service Inc. According to the Dow Theory, both the industrial companies and transport companies should move in tandem as both sectors require each other immensely. When a manufacturer produces more, shipping of such products to the market will be required hence the close positive correlation.  

The DJT is currently 3.8% away from the January record high while the DJIA is 5.8% away from the January record high. Thus, with this gap, expect the DJIA to move alongside with the DJT with a greater percentage to retest the January record high.

It was no surprise the DJT was hit hard during the February volatility storm selloff as the general market as a whole took a big hit. The DJT fell as much as -14% during that period and have since then rebounded strongly off the February low. The 200-day moving average was the crucial support that halted the massive selloff not just in February but also in April and May resulting in the formation of a triple bottom rejection. Hence, taking a zoom out view on the DJT shows a solid anchor floor at the 200-day moving average. The 200-day moving average should hold up firmly the next time another major selloff occurs.

Interestingly, with the most recent rebound off the 200-day moving average in May, the bulls have finally showed their dominance and succeeded in breaking above the 10,823 resistance area on 21 May. However, the follow through after the bullish breakout was rather lacklustre where the DJT continued to stay range bound within a smaller range with 10,954 being the range high and 10,702 being the range low. It took the market four weeks of consolidation before another breakout happened. On 11 June, the bulls jolted the DJT higher and broke above the 10,954 immediate range high. All in, it seems like the bulls are once again ready to lift price higher with the most recent bullish breakout. The January record high of 11,423 points will be the next likely target for the bulls. Expect the current bullish breakout in the DJT to lift the DJIA along with it.

Another positive catalyst that should propel the general equity market higher is the most recent interest rate hike decision. The Fed raised the benchmark interest rate from 1.75% to 2.00% during the June FOMC meeting as expected and kept the forward guidance of further interest rate hike intact. Our historical study shows that as long as the Fed continues to stay on the rate hike trajectory, the general equity market tends to rally along with it as the Fed continues to send out further vote of confidence to the market that the economy is strong enough to withstand higher interest burden. The end of the equity bull market is usually signalled by a reversal of the interest rate hike cycle to a rate cut cycle. According to the most recent Fed’s dot plot projection, the Fed does not see that coming anytime soon. In fact, the Fed is guiding the market for possibly two more 0.25% rate hikes this year and three more next year. All in, in the near-term, the general equity market should continue with this uptrend until the Fed suddenly switches to the dovish side and starts cutting interest rates.