MW Want an alternative to chip stocks? This sector with an AI angle is breaking out.
By Tomi Kilgore
A bullish 'cup with handle' pattern in a transportation ETF's chart has triggered a breakout to record highs, and the apparent resumption of a strong uptrend
The transportation sector has benefited from hopes of a Iran peace deal, but also from the build-out of data centers needed to power AI.
For those getting weary of the epic rally in the semiconductor sector, which is having the best start to a year in three decades, there could be a cheaper alternative that is showing technical signs of upside acceleration.
Transportation stocks have been on a tear, with a key sector tracker breaking out to record highs, as hopes for a peace deal between the U.S. and Iran have been driving expectations for lower oil prices (CL.1), and as a result, lower fuel costs.
The iShares U.S. Transportation ETF IYT slipped 0.7% on Thursday, but had surged 3.9% over the previous two sessions to close at back-to-back record highs. Meanwhile, the PHLX Semiconductor Index SOX rose 1% Thursday, but ended the day just below Tuesday's record close of 12,876.91.
The transport sector, which tends to be associated with the non-tech part of the market, given that it includes shares of airlines, railroad operators and trucking companies, is also tangentially benefiting from AI growth. Not only does AI help transport companies better plan their routes, it also generates demand for the delivery of materials used to build data centers, which are needed for the computing infrastructure that powers AI.
"Data centers generate a surge in transportation activity, while they are being built," Kittelson & Associates, a transportation-focused research firm, wrote in a recent report. "This includes large, temporary increases in construction workforce traffic, as well as frequent deliveries of heavy equipment and materials."
This is a sign that participation in the bull market is broadening out beyond a minority of Big Tech and chip stocks, and providing an alternative for investors looking to rotate into other areas, said Craig Johnson, chief market technician at Piper Sandler.
"While the AI-driven semiconductor rally remains the market's primary engine, its recent parabolic-like surge warrants parlaying tactical profit-taking into emerging opportunities, such as the transportation sector," Johnson wrote in a note to clients.
A bullish technical pattern introduced in the late 1980s by Bill O'Neil, the founder of Investors Business Daily, and was popularized as daytrading became a thing, ironically, during the dot-com boom of the late 1990s, has appeared in the chart of the iShares U.S. Transportation ETF, to suggest the breakout rally was just beginning.
The pattern, knows as "cup with handle," first starts with a big uptrend. Then, after it reaches a significant high, there's a correction, a rounded bottom, then a rally back to the previous peak. That's the cup.
But previous resistance holds, and there's another brief pullback that stays within the top half of the cup, and then a rally back to resistance. That's the handle. But the handle tends to lead to a breakout to new highs, which leads to a return to the previous strong uptrend. Basically, the cup with handle depicts of pattern of rally, rest, retest and resumption.
As the following chart shows, the transportation ETF - the IYT - has followed that pattern to a tee.
IYT ETF forms a classic "cup with handle" chart pattern.
Piper Sandler's Johnson said investors appear to be rotating into other areas of the market, including the transport sector, where the IYT is breaking out from a four-month "cup with handle" pattern to new highs.
"By parlaying tactical gains from tech stocks into these emerging cyclical breakouts, investors can maintain exposure to the primary uptrend while insulating portfolios against the volatility of a cooling AI trade," Piper Sandler's Johnson wrote.
Even with the recent breakout, the IYT has gained 12.9% in 2026, while the chip-sector tracker known as the SOX has soared 81.1%.
But keep in mind that on a relative basis, the IYT is a lot cheaper than the chip sector. The forward price-to-earnings ratio, a valuation measure using earnings estimates for the next 12 months, comes in at 20.6, according to FactSet data, which compares with the forward P/E for the SOX of 26.2.
It's understandable for investors to worry about selling their chip holdings too soon, but they should think of it as "trimming" rather than getting out. As MarketWatch's Phil van Doorn wrote this week, it's a strategy that can still lead to healthy, market-beating gains.
-Tomi Kilgore
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(END) Dow Jones Newswires
May 29, 2026 07:48 ET (11:48 GMT)
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