THE risk-on sentiment is back in full force once again with small-cap stocks leading the way. Since May, the Russell 2000 index had broken multiple new record highs and advanced 3.8 per cent above the prior record high in January. Most of the main equity indices have also resumed their uptrend with the Dow Jones Industrial Average (DJIA) being the laggard. The closest proxy to the DJIA is the Dow Jones Transportation Average (DJT). The DJT is a price-weighted average of 20 US transportation stocks. Some of the better-known names are FedEx Corp, Union Pacific Corp, and United Parcel Service Inc. According to the Dow Theory, both the industrial companies and transport companies should move in tandem as both sectors require each other immensely. When a manufacturer produces more, shipping of such products to the market will be required hence the close positive correlation.

The DJT is currently 3.8 per cent away from the January record high while the DJIA is 5.8 per cent away from the January record high. Thus, with this gap, expect the DJIA to move alongside with the DJT with a greater percentage to retest the January record high.

It was no surprise the DJT was hit hard during the February volatility storm selloff as the general market as a whole took a big hit. The DJT fell as much as 14 per cent during that period and has since then rebounded strongly off the February low. The 200-day moving average was the crucial support that halted the massive selloff not just in February but also in April and May, resulting in the formation of a triple bottom rejection. Hence, taking a zoom-out view on the DJT shows a solid anchor floor at the 200-day moving average. The 200-day moving average should hold up firmly the next time another major selloff occurs.