Since early September, the stock market has been in correction mode. At last week's lowest print, the Nasdaq dropped by as much as 13%, and the S&P 500 was 11% lower. The next big question is whether this is the start of a more meaningful move lower or is this a correction in the midst of a new bull market?
If this is a correction, then this will be a great, entry point in a few weeks. And, if this is the start of a move lower, then investors should remain patient or even consider selling on any strength.
There are good arguments on both sides. On the bullish side, we have an economic recovery and a supportive central bank. On the bearish side, we have a failure to reach a second deal on a fiscal stimulus package. Additionally, there's concern that the damage done during the Spring could fester and start infecting other parts of the economy.
Transportation Stocks
Since the macro picture is not giving us a simple answer to the market's direction, we can also look at the price action of various market components. It's interesting to note that economically sensitive cyclical sectors are outperforming, while the market is correcting.
The most notable example is transportation stocks. Within transportation, the strongest groups are railroads, trucking, and delivery stocks. Many stocks in the sector are showing relative strength or even making new highs. Examples include FedEx
This type of bullish price action in a bearish tape is notable. Transportation stocks are considered leading economic indicators. When industrial production is increasing, transportation companies are the first to see the benefits, since they are transporting the raw materials. If the economy was slowing, they tend to underperform and lead on the downside. So, this price action is indicative that the correction is more about an overbought market taking a breather rather than a trend change.
Second, it's price action is pointing to institutional accumulation. Up days are on higher volume, while down days are on lighter volume. There's also little volatility. This is a positive development for the sector, and if transportation stocks are moving higher, it's likely that the rest of the market and the broader economy will follow as well.
