‘Golden Cross’ materialized in Dow transports, Russell 2000

A week after a Bullish gold cross pattern formed in the Dow Jones Industrial Average DJIA,
+ 1.30%,
a few key indexes in the markets are also starting to generate upbeat chart formations – suggesting that a more technologically driven rally to other sectors of the market could emerge.

Indeed, the Dow Jones Transportation average DJT,
+ 2.72%
went close to a golden cross of her 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 dead cross, by comparison, is when the 50-day falls below the long-term average.

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

In addition, the Russell 2000 index is RUT,
+ 0.98%
was also not far from a gold cross in its charts, with the 50-day moving average of the index at 1,457.54, and its 200-day at 1,467.84.

The recent rally in the entire market has been driven in large part by investors’ demand for shares of fast-growing, high-flying technology-related stocks, at the apparent cost of other areas of the market, such as transportation and stocks with small capitalization that tends to be seen as slower growing and more sensitive to the anger of the economy and the impact of coronavirus in particular.

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

The technology-heavy Nasdaq Composite Index COMP,
has so far recorded 32 records in 2020, while the S&P 500 SPX,
+ 0.27%
is less than 1% below its most recent record-closing high on February 19 and the Dow industry is within 6% of its February 12 record-closing high.

Although the Dow industry formed a golden cross last week, small cap stocks and stocks have mounted a steady boom that has outperformed the broader market on top of its returns since March 23rd.

Hope over the state of the economy in the wake of the COVID-19 pandemic has attracted shipping by more than 62% from the market low on March 23, which is widely seen as the pinnacle of fears about the economic impact of the coronavirus. The Russell 2000 has climbed 58% since that end of March low. By comparison, the S&P 500 is up 50%, the Dow is up more than 49% and the Nasdaq has been up almost 60% for the past five months, starting Monday close.

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

Transfers closed on Monday at their highest level since February 21, helped in part by a rise in shares of FedEx Corp FDX,
+ 8.96%,
United Airlines Holdings UAL,
+ 9.35%
and UPS for United Parcel Services,
+ 1.71%,
but are more than 6% off the September 2018 record closed high. The Russell 2000 RUT,
+ 0.98%
also stands at about 9% of its 2018 all-time closing high, according to FactSet data.

One tenet of the Dow theory is that both industrial and transport should send the same signals to confirm bullish (and bearish market trends), with a higher altitude for someone who necessarily arrives when, or soon there, the other does the same.

Some analysts have also sought confirmation in the uptrend for shares in small-caps, banks and energy to assess the resilience of current trends for the broader market.