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Turnaround in a key index could be great news for the overall market

Rebecca Ungarino
Turnaround in a key index could be great news for the overall market

After lagging the broader market for the bulk of this year, the Dow Jones transportation average (Dow Jones Global Indexes: .DJT) has begun playing catch-up in recent weeks. And that could bode well for the broader market.

If the transportation stocks see further upside, the market could rise along with it, in what is historically considered a classic "Dow Theory buy signal," said Matt Maley, equity strategist at Miller Tabak. The index made a fresh all-time high Friday.

The Dow transports average "has airlines in it, it has trucking in it, it has railroads in it, and of course stocks like Federal Express and UPS. If the consumer is doing well, that means people are going to be buying more things and that means truckers have to ship more things. So, therefore, it's a good indicator for what's going on in the economy as a whole, especially for the consumer," Maley said Friday on CNBC's "Trading Nation."

The airline stocks, specifically, look attractive here, Maley said. Carriers like Delta (DAL), JetBlue and American (AAL) are components of the 20-member index. Delta was trading at all-time highs Friday and the company is set to report its quarterly earnings next week.

On the ground, investors ought to closely watch the price action in FedEx (FDX) and UPS (UPS), Maley said. He pointed out the importance that online retailing (and thus, shipping) plays for the consumer.

"If for some reason these stocks start to roll over in any significant way, that's going to be a warning signal that the consumer is starting to pull on their horns. As good as the transportation stocks look right now, the new all-time highs they're making are only slight ones. So, we'd like to see a little more upside follow-through before we jump in with both feet," he said.

Should he see positive movement for the index in the month of July, Maley said, "it will be very positive for the rest of the year."

A classic theory of technical analysis is that strength in the Dow transportation average must be seen in order to "confirm" the rally in the more widely known Dow Jones industrial average.



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