U.S. stocks finished the week mixed, with the Dow Industrials and Dow Transports posting modest lossed, while the S&P 500, Nasdaq Composite and Russell 2000 posted modest gains.

On a weekly basis, that was the first weekly loss for the Dow Industrials since late December, ending a run of eight weeks in a row with positive gains.  However, the Nasdaq extended its winning streak to nine weeks in a row.

The market has been on quite a run since late December, and most people are feeling pretty good about it overall.

The one fly in the ointment in my view remains the Dow Transports…they are still lagging the market overall, after leading the correction.  While the Industrials are just about 800 points below their all-time high close, or less than 4% below the peak, the Transports are 1,100 points below their high peak, or still nearly 10% below.

The Dow Industrials have also surpassed their early December highs, while the Transports have not.  Have a look at the charts below.

Dow Industrials

Dow Transports

I’m a big proponent of Dow Theory, unlike many who follow the markets.  The Transports are very sensitive to economic conditions and energy prices.  High energy prices have a significant impact on the earnings of these companies, while a weak economy means fewer goods are being shipped.

Outside of the U.S., the global economy is weakening.  Canada just reported that its GDP in the 4th quarter rose just 0.1%, compared to 2.6% in the U.S.  Japan reported negative GDP in the 3rd quarter.  China has reported a significant drop in manufacturing activity.  Europe has also slowed.

Eventually, these issues will catch up to the U.S. economy, unless we finally get a trade deal with China.

With a relatively flat yield curve (2 year yields at 2.53% and 10 year yields at 2.74%, I am keeping an eye on the High Yield market, which is also often a leading indicator.

HYG is the Ishares High Yield Corporate Bond ETF and it rallied sharply with the market after bottoming in December.  HYG hit a peak in July 2017 and was trending lower, well ahead of the peak in the stock market.  It has also rallied for nine consecutive weaks.

High Yield Corporate Bond ETF

If I see any significant weakness in HYG and the Dow Transports, I will go back to being very cautious on the market.

At this point, many of the stocks that have led this market rally are quite extended and due for a pullback.  A healthy market will undergo a pullback or sideways price action for a few weeks to a couple months before embarking on another major rally.

The fact is, no one saw this rally off of the December lows coming.  Many are willing to say that the bull market run has resumed.

I’m not yet willing to jump on that bandwagon.  The next few weeks should tell us quite a bit.