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It Would Be More Convincing If Transports Were Breaking Out

  • Written by Syndicated Publisher 1 Comment1 Comment Comments
    March 3, 2014

    The S&P 500 created a lot of excitement this week by finally breaking out above the  3 months of stubborn resistance to a new high.

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    However, the DJ Transportation Avg is the more trusted leading indicator for both the economy and stock market. And particularly when its strength is confirmed by the Dow Industrials.

    The reason is quite straightforward. Transportation companies see the pick-up or decline of business activity before it shows up in the economic reports a few months later. They see the shipments of raw materials to manufacturers, imports of parts and sub-assemblies from foreign producers, exports of finished products, shipments of finished goods to wholesalers and retailers, and the shipments of final sales to consumers.

    The most recent example was the warnings from the likes of UPS and FedEx last fall and the subsequent economic slowdown (GDP) in the 4th quarter, and continuing dismal economic reports in January and February.

    Therefore, the breakout by the S&P 500 (and always more volatile Nasdaq) would be more convincing if it were being confirmed by the DJIA and DJ Transportation Avg.

    But they have not rallied back from the January plunges nearly as much as other areas of the market, apparently not as convinced as the all-clear seemingly signaled by the S&P 500.

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    More short-term observations.

    The U.S. market closed positive for the week, but a troubling daily pattern emerged most days, of strength in the morning giving way to significant selling in the afternoon. That is considered to be a bearish development if it continues. It’s taken as a sign that public investors, whose activity usually dominates the early going, are being encouraged to buy in the first half of the day, and program-trading firms, professional traders, and hedge funds, whose activity usually dominates the late day trading, are then selling to take the quick profits. 

    Yesterday was a classic example. The Dow was strong all morning and up 126 points by mid-afternoon. But then the bottom dropped out, and quickly. It was down 50 points less than an hour later, a downside swing of 176 points. It erased a good portion of the gains for the Dow and S&P 500. The NASDAQ, which was the weakest of the major averages throughout the day, finished the session in the red.

    But they did manage to spike the Dow and S&P 500 back up with buy programs in the final half hour to close the Dow up 49 points, and the S&P fractionally back into positive territory going into the weekend.

    The majority of investors get home from work for the weekend, happy if their cursory check of the market, a look at how the Dow closed, is positive. But the small positive close does mask the day’s real activity recently of buying in the morning being hammered by selling in the afternoon.

    Next week:

    The ‘monthly strength period’ was due to begin on Thursday and to run through next Thursday.

    An additional potential short-term positive is that Berkshire Hathaway’s earnings are out, along with Warren Buffett’s traditional annual letter to his investors today. That means Buffett’s annual cozy interview with CNBC’s Becky Quick, scheduled for Monday, will be the leading publicity on Monday, and will be rebroadcast and quoted from for days.

    We can expect the usual Buffett cheerleading for the U.S. economy and market (which is equally positive whether the economy is plunging in a recession or even financial meltdown, and the stock market is in a serious bear market, or if everything is going great).

    But it will also be a week of very important economic reports, including the employment reports and U.S. trade deficit.

    Other Voices:

    Walter H. Weil, Barron’s: “During the past 25 years, there have been only five previous occasions when Investors Intelligence found bullishness so extreme that more than 60% of newsletter writers were bullish versus 20% or fewer bearish. . . . . . . . Recently, the reading was 61.6% bulls, 15.2% bears—a level not seen since the top in October 2007.”

    Mathew Lynn, London Eye: “Investors buy gold in times of economic turmoil. So what kind of warning is the precious metal sending us right now? There are three possibilities — a crash in China, the arrival of deflation, or a fresh recession in the developed world. Whichever it is, gold has been more often right than wrong in the past — and it would be foolish to ignore it now. The financial markets have not run according to the script so far this year. Equities were meant to power forward as the global economy recovered, bonds would tank as central banks stopped printing money, and gold would continue to be the unwanted  “barbarous relic”. None of that has happened, and gold, in particularly, has gone wildly off-message. After experiencing its worst slump in three decades in 2013, it is now rising fast again.”

    From academic study presented at Chicago Booth Global Markets Conference yesterday:“Unconventional monetary policies (including QE and ‘forward guidance’) can build future hazards by encouraging risk-taking that is not easily reversed in a controlled manner.” Study authored by Michael Feroli, chief U.S. economist J.P. Morgan; Anil Kashya, Chicago Booth School of Business; and Hyun Song Shin, Princton University.

    Lucia Mutikani, Reuters: “Hints of economic thaw emerge.  . . . . First-quarter growth is forecast at below a 2 percent pace. But other data on Friday on consumer sentiment, regional factory activity and housing suggested some economic thawing, which should put growth on a stronger path later in the year. . . . . . . A number of Fed officials on Friday made clear they still believed the economy was on an improving path. “I’d still project that 2014 would have stronger GDP growth than 2013 did,” even if recent signs of weakness turned out not to be weather-related, St. Louis Federal Reserve Bank President James Bullard told CNBC television. . . . . . The economy averaged growth of just 1.9 percent last year after expanding 2.8 percent in 2012.”

    To read my weekend newspaper column click here:  Do Economic Reports Mean Anything This Time-

    Subscribers to Street Smart Report:

    In addition to the charts and signals in the ‘premium content’ area of this blog, the new issue of the newsletter from Wednesday is in your secure area of the Street Smart Report website

    Images: Flickr (licence attribution)

    About The Author – Sy Harding, Street Smart Report

    Sy Harding publishes the financial website Street Smart Report Online and a free daily Internet blog at Sy’s Free Blog. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!

    It includes our research and analysis on the economy and markets, and provides charts and buy and sell signals on the major market indexes, sectors, bonds, gold, individual stocks and etf’s, including short-sales and ‘inverse’ etf’s.

    It provides two model portfolios as guides. One is based on ourSeasonal Timing Strategy, one on our Market-Timing Strategy.

    In depth updates are provided every Wednesday, with interim ‘hotline’ updates every time we make a trade. An 8-page traditional newsletter Street Smart Report is provided on the website every 3 weeks, in pdf format for viewing or printing out.

    There is the Street Smart School of online technical analysis ‘seminars’,commentaries to keep you ‘street smart’ about Wall Street, and much more. 

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