While Wall Street was watching the S&P 500 hit record ground for the first time in six months, the Dow Transports sneaked to new all-time highs.
Its rally confirms one half of a classic market theory that could point to more highs, according to Matt Maley, equity strategist at Miller Tabak.
“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 told CNBC’s “Trading Nation” on Tuesday.
The Dow Theory posits that the stock market is on the upswing when the Dow transportation average and the Dow industrial average make new highs, either at the same time or shortly after one another. It is predicated on the idea that in an economy, transports deliver what industrial companies produce, and so one index will move in tandem with the other.
The Dow transportation index hit an all-time high on Tuesday for the first time since mid-January. The Dow industrials is still a 3 percent rally from its own highs.
While the Dow plays catch-up, the next leg higher for the transports should come from the airline stocks, Maley predicts.
“The airline stocks actually saw a correction in the first half of the year and now they’re bouncing back so they have some upside potential here,” he said. “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.”
The XAL airlines index dropped 22 percent from the peak in mid-January to a bottom in late June. A decline of more than 20 percent pushes it past a correction and into a bear market.
The breakout in the airlines could have more to do with commodity markets than the economy, counters Gina Sanchez, CEO of Chantico Global.
“They’re very sensitive to jet fuel prices, and so 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.
The XAL has broken higher over the past seven weeks. Since the beginning of July, it has surged 10 percent. Over that period, crude oil prices have fallen 11 percent.