Signs of a Broad Market Rally Abound

The shrill noise of the fiscal cliff reporting is drowning out several important market events you need to watch heading into the New Year.

For example, did you know that several European markets are breaking out? Just look at the German DAX. After its fifth-straight month in the green, the index is testing its 2011 highs. Even Asian and emerging market indexes are pushing sharply higher this month�

After stalling out this summer alongside the S&P, the German DAX doubles up its U.S. counterpart�

It�s not your fault if you hadn�t noticed some of these breakouts. The fact of the matter is only market technicians are talking about price action these days. Everyone else is attempting to trade the news — and they�re failing miserably.

As investors continue to fret over taxes and the government�s budget predicament, the market has quietly entered full-on melt-up mode this week. It�s a Santa Claus rally for us all to enjoy — even though everyone was expecting coal in their stockings.

But before we could see the holiday rally in full, we had to endure a �Fed fake� last week�

When Bernanke pegged interest rates to unemployment last Wednesday, traders sold the news. The market’s 48-hour tailspin gave the fiscal cliff criers even more ammo — until Monday morning.

Now it’s �market melt-up� time. The S&P has popped 2% since Friday’s lows — and the Dow’s not far behind.

We could see more of the same next week and even in the weeks to come. No one pays attention to the markets during the last week of December, even though that’s usually the perfect environment for low-volume rallies.

There�s one more indicator that�s also pointing toward higher prices. Take a look at the Dow Jones Transportation Index:

The transports have powered higher over the past several weeks, breaking cleanly above downtrending resistance that has remained in place since the 2011 market correction. This breakout is helping to plot the transport�s course toward new 52-week highs�

An upside breakout in the transports can be an important signal to a long-term trend follower. The index is a crucial component of the Dow Theory, which provides technicians with basic tools needed to identify the market�s primary trend.

Here�s the part of the Dow Theory I�m talking about in a nutshell:

The theory states that the market is in an uptrend if either the Dow Jones industrial average or the transportation average breaks out to a new high and the move is subsequently confirmed by the other average. The idea behind the theory is that the economy is displaying strength when goods are being made (represented by the industrials) and shipped (represented by the transports).

It�s a simplistic measure of market strength. And obviously, it will be late when it comes to triggering changes in trends. Nevertheless, it�s important to take a step back from the day-to-day volatility of individual stocks to see how these indexes are reacting to longer-term areas of support and resistance.
For comparison, here�s how the industrial average looks on a weekly chart:

As you can see, industrials are also headed in the right direction. Multiyear highs aren�t that far off. Given the newfound strength in transports and continued bullish action from the industrials, there are plenty of reasons to be bullish looking ahead to the 2013.