Market Extra: ‘Golden cross’ materializing in Dow transports, Russell 2000

A week after a bullish golden cross pattern formed in the Dow Jones Industrial Average
DJIA,
+1.30%
,
a pair of important stock-market indexes are also beginning to generate upbeat chart formations—suggesting that a mostly technology-driven rally may be fanning out to other sectors of the market.

Indeed, the Dow Jones Transportation Average
DJT,
+2.72%

was closing in on a golden cross of its own. A golden cross occurs when the 50-day moving average for an asset price trades above the 200-day MA, while a so-called death cross, comparatively, is when the 50-day falls below the long-term average.

The 50-day for the transports, which tracks the performance of 20 large U.S. airlines, truckers, railroads and shippers, was at 9,535.54, while the 200-day stood at 9,635.68 Monday evening, or about 1% from the short-term average (see chart below):

On top of that, the small-capitalization Russell 2000 index
RUT,
+0.98%

also wasn’t far from a golden cross in its charts, with the index’s 50-day moving average at 1,457.54, and its 200-day at 1,467.84.

The recent rally in the overall market has been largely fueled by investor demand for shares of fast-growing, highflying technology-related stocks, at the apparent expense of other areas of the market such as transports and small-capitalization stocks that tend to be viewed as slower-growing and more sensitive to the vagaries of the economy and the impact of coronavirus in particular.

Notably, the Dow transports are viewed by so-called Dow theorists as a further tool to confirm an overall trend in the stock market. Dow Theory is based around the idea that watching how Dow Jones benchmarks behave can provide clues about future market direction.

The technology-heavy Nasdaq Composite Index
COMP,
-0.38%

has registered 32 records so far in 2020, while the S&P 500
SPX,
+0.27%

is less than 1% below its most recent record closing high put in on Feb. 19 and the Dow industrials are within 6% of their Feb. 12 record closing peak.

Although the Dow industrials formed a golden-cross last week, transports and small-cap stocks have mounted a steady resurgence that have outperformed the broader market based on their returns since the March 23 lows.

Hopefulness about the state of the economy in the aftermath the COVID-19 pandemic has spurred transports up by more than 62% from the low point of the market on March 23, which is widely viewed as the apex of fears surrounding the economic impact of the coronavirus. The Russell 2000 has climbed 58% since that late-March low. Comparatively, the S&P 500 is up 50%, the Dow is up more than 49% and the Nasdaq is up nearly 60% over the past five months, as of Monday’s close.

That said, transports saw a more pronounced fall ahead of the lows as did small-caps, and neither the transports nor the Russell 2000 index have put in a record close in nearly two years.

Transports closed on Monday at their highest level since Feb. 21, helped partly by a surge in shares of FedEx Corp
FDX,
+8.96%
,
United Airlines Holdings
UAL,
+9.35%

and United Parcel Services
UPS,
+1.71%
,
but are off more than 6% from the September 2018 record closing high. The Russell 2000
RUT,
+0.98%

also stands about 9% from its 2018 all-time closing high, according to FactSet data.

One tenet of Dow theory is that both the industrials and the transports have to send the same signals to confirm bullish (and bearish market trends), with a higher high for one necessarily coming as, or soon after, the other does the same.

Some analysts have also looked for confirmation in the uptrend for stocks in small-caps, banks and energy to assess the staying power of current the run-up for the broader market.