In a word, stay the course and watch the weekly closes of the indexes.
Over the past two years, the Dow Jones industrials and S&P 500 have been in a bear market (kind of ... more below). But recently, they started hitting new all time highs over and over again. The Dow Transportations stopped confirming the new all time highs being made by the Industrials a full two years ago. The Transportations subsequently lost 27% of their value between December 2014 and June 2015. That's the classic definition of a bear market.
In the meantime, the Dow industrials made several new all time highs in the same time frame, and then got pounded, shedding 12% in June 2015. Upon bouncing back, the Dow confirmed a new primary down trend by failing to make new all time highs.
This was November 2015.
One more 10% shake down at the beginning of 2016 was the end of the bear. The low the industrials made this time was lower than the initial bear market low they had made in September 2014. Around the same time (January 2016), the Transportations hit a capitulation low that was lower than the initial Bear market low set in September 2015. This confirmed the end of the bear market for the transportation index and also signalled the end of the intermediate bear trend for the Industrials. This was actually the best time to get into the stock market with both feet. But I only started watching things again in June of 2016, and the primary up trend had already been re-established.
As I speak, both indexes have now rocketed to new all time highs. A lot of the analysts I follow are starting to say that the markets are looking top heavy. Only time will tell if they're right.
The first lesson here is that the big sell-offs in the Dow industrials were preceded by the transportation index failing to confirm the new highs being made by the Dow Industrials between December 2014 and June 2015.
The second lesson is that it's important to watch both indexes on a weekly basis. Daily stuff will just make you crazy. And it's even better if you only look at the indexes once a month, or once a quarter. Build a snowman, go skiing or play with your kids ... that's way more fun.
Here's where the rubber meets the road. The Transportation index must confirm all subsequent highs made by the industrials (and visa versa). This is extremely important in signalling the continuation of the primary up trend. Major divergences in either index is a warning sign.
Stay sharp, and have fun!
