This week all the railways accelerated higher and the Railway Index broke out to new highs. But the breadth across all the railways is particularly important.
I've chosen Kansas City Southern (KSU) to demonstrate the railways are breaking out. Recently KSU surged above and then pulled back. It continued to get support over the last two months at the 200 DMA. This week the stock broke back above the trend line. The SCTR has surged above 75 and the Relative Strength is breaking out from a three-month downtrend. The volume has surged the last two days and the MACD has moved above zero. This looks very bullish.
A brief look at the SCTR rankings for the railroads suggests that almost all have become top performing stocks above 75.
As the rails are breaking out, this looks like an industry-wide trend. Here is a chart of the Railroad Index ($DJUSRR). Notice that it topped within a few months of the Energy industry top in mid-2014. Now that the energy industry is turning up, it looks like this is following suit. The energy industry is a large buyer of steel and sand as an example. They also put a lot of commodities on the rails from raw crude or products that are distilled from the fracking towers at refineries. While this may not be the sole reason for the improvement in the railroad stocks, it probably is part of the larger story.
I like when the entire industry SCTR's surge above 75. Broad strength in the group looks good, and I think the railways are a nice place to start. As I said in the opening statement, the breadth across all the railways is particularly important. The SCTR is one of the best ways to identify the strong price action quickly across the group.
Greg Schnell, CMT, MFTA.