BLAME IT ON THE BOTS
Late last month I penned a posted titled, "5% Drop in the Transports Dead Ahead". Like many of the posts that I hang out there, the HFT bots must have read the headlines and conspired to make me look a bit foolish on timing as the market has been able to tread water and the transports didn't immediately lose 5% with 3 minutes of posting like it should have!
Seriously though, as soon as I posted it, I began to look at the action in the transports over longer time frames and make some notes that I wanted to share. The first point I wanted to show is that the transports are important! There is a pretty strong relationship between the transports and the stock market, and darn it, between the real economy too. While I remind myself daily that the stock market is not the economy and the other way around, in longer term time frames the economy does matter to the market. Ben Bernanke seems to think so as well, since he believes strongly that the market can drive the economy. If he didn't, he wouldn't have spent trillions increasing his balance sheet to buy treasuries and MBS to make everyone feel like the economy is better. Remember, feelings may lead to reality….he hopes.
I think I have to reinforce here that the transports really are the ultimate indicator of the real economy, thus I have often posted the rail traffic and tonnage data in past years when it was easier for me to post. That is the important linkage, that at the end of the day, rails and freight and air deliveries are a direct result of the production and health of the economy. If UPS, Fed Ex, Con-Way, JB Hunt, and Kansas City Southern all show a slowdown, my guess is that the general economy is slowing down. Stocks will typically try to predict that slowdown unless there is some process that interferes with the pricing discovery in the market (QE3 anyone?).
So, where are we going? Check out this chart which contains twenty years worth of prices for the transports. In the back ground of the chart I have included the SPX in purple.
DIVERGENCES AND HOW THEY PLAY OUT
I searched this chart in an attempt to find periods of time where the transports declined, but the SPX did not. Previously, we had an instance in 1992 where the transports dropped for almost an entire year and the SPX simply moved sideways to higher. At the beginning of 1993, the transports ripped much higher. This seems to be the one point of divergence that wasn't corrected.
The other significant period where the transports dropped and the SPX did not was the time frame from early 1999 to early 2000. This of course was the blow off top of the tech bubble where you were an idiot if you didn't have your entire net worth wrapped up in CMGI, JDSU, Peapod and Pets.com. During that phase, transports fell and the SPX ramped higher. We all know that in March 2000, reality somehow interjected itself into the market frenzy and despite the rally in the summer, Mop and Pop ultimately ended up holding the bag for the great tech swindle.
So, the point of my post here is not to revise my article stating that the transports were going to decline 5%. In fact, this breather serves to reinforce that exact notion that the transports are tired and cannot generate enough momentum to break overhead resistance. The tired trading is shown here below and I still look to 4700 as the target for the transports. Additionally, I have to highlight that the 14 day EMA is now well below the 40 day EMA. This is entirely bearish from a longer-term swing trade view for the transports. The question we need to ask ourselves is, "Is this 1992, or is this 1999?". Let's hope it's 1992, because I don't think Mom and Pop can stand another summer and fall of 2000.
Finally, if you are interested in the attempt by Felix Baumgartner to free fall from 23 miles up in an attempt to make a sonic boom and exceed speeds of 614 miles per hour whle drinking red bull, please check out this post. FREE FALLING. The attempt was aborted today, but I will continue to post the live feed on the blog so we can view it if you have an interest.
Goatmug is an investor that cares about you and your family. Goatmug's Blog – Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments athttp://www.goatmug.blogspot.com/