Can Tech Keep Carrying the Stock Market?

In this IBKR Podcast episode, Andrew Wilkinson is joined by David Keller, President and Chief Strategist at Sierra Alpha Research, to examine whether technology can keep driving the stock market higher as transports and financials struggle. They discuss market breadth, Dow Theory, rising energy costs, the yield curve, and what it could take for the Nasdaq Composite to reach 30,000.

Summary – IBKR Podcasts Ep. 429

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Andrew Wilkinson

Welcome to today’s podcast. I’m joined today by president and chief strategist of Sierra Alpha Research and host of his own podcast, Market Misbehavior. Warm welcome to David Keller. Welcome back to the program, David. How are you? 

David Keller

Thanks, Andrew. I’m well. Good to see you again. 

Andrew Wilkinson

Are you quite happy that the Nasdaq is at an all-time high as we record this on Tuesday, September the 22nd? 

David Keller

If you picked up on the subtle optimism, I guess so, right? I mean, I would say that as a technical analyst, it’s hard to be thrilled by an index going to new highs or panic that not all is well, and we’ll probably get into some of that, right? Not all of the signs are as encouraging as you might hope, given the fact that the Nasdaq is achieving that feat this week. 

Andrew Wilkinson

And I mention it for a reason because we picked up the phone yesterday to speak to one another about today’s subject. We’re gonna talk a little bit about Dow theory. And we’re certainly gonna get into the market’s doing one thing at one end, but it’s doing another thing at the other. So Dow theory, for those of you who are familiar or unfamiliar, has long viewed transportation stocks as an important confirmation signal for the broader market. 

If the transport sectors lag while the S&P makes new highs, just how concerned should we be, David? 

David Keller

Yeah, and Dow theory really, I mean, it was foundational for technical analysis from the early 20th century. And Charles Dow created this idea of looking at the Dow Industrials and the Dow railroads at the time. And the concept was the producers of goods, the industrial companies, and then distributors of goods, the transportation companies, at the time railroads. And if they were both doing well, things are good, the economy’s functioning well, conditions are great. If they’re both doing poorly, pretty clear sign that the economy is struggling. If one of them’s working and the other is not, that tells you there’s some sort of underlying issue that may not be fully reflected in the major indexes, right? And so, modernize that to 2026, and I would say transportation stocks now, of course, it’s shipping, it’s freight, it’s trucking, it’s delivery services, and there are also companies that aren’t in transportation, things like Amazon and others kind of own their own distribution network. But at the end of the day, we’re really trying to just measure how are goods being distributed around the United States and is that working or not? 

And unfortunately, what we see right now is transportation stocks are really struggling to keep up. We see that across the board in all of those groups that I just mentioned. They’re in varying degrees of breakdown. So while some areas of the equity markets are quite strong, the fact that the transportation names, which often are thought of as sort of the backbone for the goods that need to make it around the country, are struggling quite a bit. So I would say on the checklist of things to be bullish about, I would say transportation breaking down, definitely not on that list. 

Andrew Wilkinson

So higher diesel prices are probably one of the bigger components that we can pin on a fundamental basis for that squeeze of margins for trucking, rail, shipping, and logistics. Are you seeing evidence of that pressure in the charts, or is the market shrugging it off? 

David Keller

Yeah, for sure. So, right, when you think about combining the technical approach with some of the fundamental inputs, a lot of times you can sort of attribute patterns you see on the charts to clear macro influences, right? And things like inflation, interest rates, energy prices certainly play into the top line and then the bottom line for a lot of these companies. 

And so for shipping companies, just the cost of getting goods around here was a known byproduct or sort of a known, probably adverse side effect of events in the Middle East. And as crude oil prices accelerate to the upside, as Brent crude surged above $100 a barrel, you start to think about airlines and all the other companies that their business is moving things around, and it’s just getting a lot more expensive to do so. So economics 101 tells you that’s probably weighing on these companies. The question has been, how much does it really weigh on their bottom line? How much is it impacting their business? And I would say the fact that these transportation stocks are all starting to rotate lower essentially across the board really speaks to the fact that there’s been a sustained period with higher oil prices really starting to have some ripple effects. And now investors are sort of skeptical that these companies will be able to thrive given just the higher cost of doing business. 

Andrew Wilkinson

Now, last time we spoke, David, you talked about relative strength. It was a big part of what you do. How are the transportation stocks behaving on a relative strength basis compared with the broader market right now? 

David Keller

They’re really not good, Andrew, to be honest with you. I mean, it’s pretty ugly, right? And I would say relative strength is so valuable because it helps you just sort of look across the equity space, what’s working and what’s not. And I truly believe, and in my experience working with successful money managers, if you can just have a consistent process of rotating out of what’s not working and rotating into what is working, you’re gonna generally remove the weaker stuff from your portfolio. You’re gonna be generally adding things that are starting to strengthen. And so if you look at things that are emerging in a position of strength, number one, the industrial sector in general, not a lot of places to be excited about. I mean, this has been one of the sectors that’s been struggling on a relative basis quite a bit, particularly in Q3, now going into Q4. 

But you’re seeing that acute underperformance in some of these areas we’re talking about, some of the transportation groups. So what does that tell you? That basically tells you that this is a group of stocks that’s underperforming. And until and unless you can find some stability, until you can find some signs of accumulation, some signs that investors are buying into that weakness, that would be something to get excited about. We’re seeing some of that, right? We’re seeing some stocks testing key moving averages, like their 200-day moving average. But for me, until you see signs of buyers coming in and buying into that weakness, at this point, it feels more like a falling knife, and I’ve learned to stay away from those as much as possible. 

Andrew Wilkinson

Yes. I couldn’t have put that better myself. Historically, there have been periods when fuel prices did rise sharply, but transport stocks outperformed anyway. What made those situations different than today? 

David Keller

That’s a really good question. And I would say, to be honest with you, to generalize a bit, I would say we have to be careful in terms of tying a macro driver too closely to performance of the cycle. What we have to remember is with things like shipping names or transportation names, fuel prices are a key factor, but they are one factor, right? And so there are other things that could be much more of a tailwind. So I tend to think of things like fuel prices less as a, if crude oil goes up, stock A goes down. I don’t think of it as that direct of an inverse relationship. You think more of it in terms of tailwinds or headwinds. A friend of mine always talked about riding your bike into the wind, right? 

If you’ve ridden your bike much, there’s a big difference between having your wind at your back, feeling like you can pedal forever, versus going uphill, going into the wind, and just every pedal is a slog. And I think what you have to remember is when crude oil prices are going up, when it’s getting more expensive to do business, that’s a big headwind. 

That doesn’t mean that the stock can’t still do well and can’t still outperform. It just means that it’s gonna be tougher to do so. A lot of times, some of those times when industrial names have done well despite stronger crude oil prices, a lot of times it’s because other things are struggling. And so, on a relative basis, it’s able to hold its ground a little bit better. So that’s why relative strength, again, for me, becomes vital at this point, just to see if this is still an opportunity that sets us apart from other names out there. 

Andrew Wilkinson

Is there a single most important chart that you’re gonna be looking at now to the end of the year to determine whether transportation’s just going through a temporary setback or maybe when the headwinds are shifting a little bit? 

David Keller

That’s a really good question. There’s a lot of really cool breadth indicators that you can run on different groups and different sectors. So if you think about the S&P 500 as a group of stocks, if you think about an industrial index or a transportation index as a group of stocks, looking at breadth conditions basically says instead of just looking at the performance of the index, which we’re gonna look at that too, don’t get me wrong, we also wanna look at the performance of the individual stocks that make up that index. 

Because you have to remember, transports have a number of different things kind of in that general bucket, right? As we’ve mentioned, right? It’s airlines, it’s shipping, it’s freight, it’s delivery services and a bunch of other related groups. So looking at the breadth conditions and starting to see, at this point, the breadth is very weak because most of those stocks are all kind of in a primary downtrend at this point. 

But if you start to see buyers come in, you’ll see the breadth indicators start to turn higher. And a lot of times what will happen is before the index itself really starts to improve, we’ll start to see the breadth indicators go from very negative to a lot less negative. And so that turn higher in breadth means at least some of the names are starting to see buyers come in. So I would say for now, transportation stocks, I think of them as a group that’s guilty until proven innocent. The way you sort of rotate to that innocent bucket is you start to see improving breadth. That means at least some of those names are starting to turn higher. Again, we’re not seeing that at this point here toward late September. But that’s something to watch for at the beginning of Q4 for sure. Because if the broader indexes go higher, if technology is able to sort of propel this market higher, we could see a great catch-up trade in beaten-down areas like transports. 

Andrew Wilkinson

It’s happening globally as well, isn’t it? It’s not just the US. So when you step back and look at today’s market, what’s more important? Is it the fact that the stock market, as measured by multiple indices, are broadly making new highs, or the fact that a group as economically important as transportation is struggling under higher operating costs? 

Which signal should investors trust more? Two groups of investors there, I’d imagine we’ll end up with, David. 

David Keller

For sure. And I think that’s a vital question. And I think that could arguably be the question for Q4, right? Because what we’re seeing right now, as we wind down Q3, is there is one sector dominating, right? So if I order all the stocks in the US by some sort of momentum factor, and you could pick any random one, I would bet most of the top 20 or 30 stocks are all in the technology sector, and most of those are probably semiconductor names, would be my guess. And there’s some random healthcare and some random other names peppered in, but this is really a theme that’s dominated in technology. Now granted, that’s 40% of the S&P 500, so that means a lot. But what we’re seeing right now is transportation’s not the only group that’s kind of struggling. 

Financials are struggling quite a bit right now. There are a lot of very underwhelming charts in a sector like financials, which I was taught back in the day, you want to see financials because that means people are borrowing. That means good things are happening. Those are sort of the injections of capital that allow the economy to grow. We’re not seeing those signs in financials as well. So the question is gonna be how much can the market go higher if it’s only technology essentially that’s driving it? And I would say the answer probably is higher to a degree, right? Once you have that initial breakout, which we’re starting to see in things like the Nasdaq pushing higher, at some point, the question is, are other stocks gonna participate in this uptrend? 

And if not, if you don’t see transportation start to improve, if you don’t see areas like financials, which are the types of names you want to do well if the economy’s functioning appropriately and properly, if those don’t participate, then you have to question the sustainability of the rally. Then it becomes more of a, I would say, tactical play within a really strong group as opposed to a broad market advance. So for me, I mean, I’m skeptical that the benchmarks can experience meaningful upside without areas like transportation starting to participate, which is why, again, breadth analysis, which is what you’re alluding to, looking at the stocks and seeing if they participate, I think that’s gonna be a crucial question to ask. 

Andrew Wilkinson

I saw something yesterday, a very well-known market bear was saying that on the S&P 500 index, 8,000, yeah, no problem. That’s very achievable before a new fall. Would you say there’s a round number maybe on the Nasdaq that fits in nicely here to that view? 

David Keller

Yeah. So that’s the question, right? And I think that’s gonna be the challenge, right? If we do see a move higher, how much further can we go? And then what comes after that? And the question is going to be, is this sort of renewed strength that we’re seeing in the AI theme sustainable to the point that it’s actually gonna start to drive things meaningfully higher? And are we gonna see the ripple effects of that breakout? There’s a number of ways in the technical analysis toolkit we can try to project sort of further upside potential. On the Nasdaq Composite, sort of testing previous all-time highs just above 27,000 as we’re recording this, and that’s after pulling back quite a bit in June and July, and then sort of retracing back to those peaks. So a reasonable upside expectation could be taking the height of that pattern and projecting it beyond that level. That would take us up to around 30,000 on the Nasdaq Composite, which would be another, what, 10%, 12% above current levels. I think that’s a reasonable upside expectation. Would I expect anything beyond that? Without some broad advance with much greater participation, I think that would be hard to imagine a sustainable move beyond that. 

Andrew Wilkinson

And the other thing, you mentioned financials. Financials typically do well when the yield curve steepens. I’m just not really understanding what the beef is with the financials at this point. 

David Keller

Yeah, so the financial sector is struggling here, right? On a relative basis, and a lot of the bigger banks that had done quite well are sort of struggling. There’s a small subset, and it’s sort of the names kind of outside of the norm, right? The money center banks, the regional banks are all struggling. And it’s counterintuitive to some degree because the 10-year yield’s pushing 5% now, and theoretically, as you may know, can go a lot higher than that, right? There’s no magical ceiling at 5%. It’s just that’s about the highest it’s been for many years. Well, I think the big difference right now is the shorter end of the curve is accelerating to the upside, right? 

So as the Fed’s starting to raise rates, the two-year yield is actually a really good leading indicator to sort of see what the market is anticipating in terms of shifts in Fed policy. So the two-year yield has actually been accelerating higher much more quickly than the longer end of the curve. So while 10-year yields are going up, the short end is actually going up pretty quickly, so the whole yield curve’s kind of shifting up. So we’re actually flattening a little bit. If you look at the spread between the twos and the tens, it’s only about 25 basis points, I think, when I was checking earlier today. So the short end is rising even more aggressively, and that shape of the yield curve is really, to your point, what often drives sort of the argument for financials. So it’s just less of an ideal situation. If we would see a shift in that to some meaningful degree, more of a normalization, that could be a great sign. But we’re just not seeing it yet. 

Andrew Wilkinson

Yeah. That’s a very interesting point. I hadn’t actually looked at the gradient of the curve, and if it’s flattened that much, there’s not that much in it to trade. It begs the question, what happens if the Fed hikes again? Do they invert the curve? And at that point, what’s the prospect for financials? But that’s a question for another day for David Keller from Sierra Alpha Research. David, thank you so much for joining me. 

David Keller

Oh, it’s a pleasure anytime, Andrew. Thank you. 

Andrew Wilkinson

All right. And thanks to the audience for taking the time. And don’t forget, if you liked today’s episode, remember to subscribe wherever you download your podcasts from. Bye for now.