Transportation Tea Leaves

The Dow Theory in a nutshell was that before you or I could go to a store and buy something, it had to be made. Before that, it had to have raw materials shipped to the factory. So by watching transports, you could spot a rising market first as the transports would get more business first, then the manufacturers, and eventually the retailers.

With that in mind, I find this chart a bit of a bother:

Dow Jones Industrial Av. vs D.J. Transportation Av. vs SPY 5 year weekly chart

Dow Jones Industrial Av. vs D.J. Transportation Av. vs SPY 5 year weekly chart

DJIA is the actual Dow Jones Industrial Average (not the DIA Diamonds ETF that tracks it) and the DJTA is the Dow Jones Transporation Average. SPY is the ETF that tracks the S&P 500 stocks.

DJTA looks to have cleanly peaked and rolled over before the DJIA or SPY.

I only have one Simple Moving Average (SMA) on this chart. 40 weeks. With 5 trading days / week, that is the classical 200 day moving average. When a stock drops below that, it is in a bear market configuration. The DJTA is clearly below it.

DJIA and SPY are both in a ‘double top’ configuration right now. At this point it is an inflection point in market sentiment. IFF price pushes through that ‘resitance’ to a new all time high, things tend to rise for another round ( IMHO a month or two until The Fed raises rates and kills the party buzz of free money). IF price “failes to advance” and drops back down, the “double top” is in and it’s a bear market confirmation.

But the Transports have already done that… About 6 months ago.

We also know metals are way down and not budging. (One must mine and ship some copper prior to making blenders, cars, homes, or cell phones). Metals are NOT saying anything good at all. Partly that is a strong $US reflected in the price in $US, but partly it is just weak demand. Millennials are more interested in ‘experiences’ than in collecting a house full of stuff. China has hit the Economic Pause button. The Middle East is way too busy killing each other to think of buying things. Russia is embargoed for some (much?) stuff. The E.U. is driving itself to poverty (both fuel and economic via socialism and an influx of invaders migrants demanding Government Largess that is no longer fundable). The whole Emerging Market world is in sad shape ( Brazil is on the Socialist Rocks again, along with much of Latin America) with Africa slowly decaying back to pre-colonial tribalism. Add in that The Baby Boomers are at mid-retirement age. We are cashing out and downsizing more than buying stuff.

The only good news is that car sales are up, near as I can tell. But that won’t last forever. It’s a binge on low gas prices and nearly free financing. As soon as demand is met, that door slams shut. Housing sales have tailed off already.

So just whom is going to buy stuff to get it manufactured and transported?

Looking at the indicators:

Volume was high in that early drop, then slowly faded into about Oct 2014 when a down spike caused a volume spike. Volume has risen during this downside run, and is not very strong on that little up tick at the end. A bit ambiguous, but not encouraging in any case.

DMI (down at the bottom) has “red on top” being bearish and with ADX (black line) dropping toward 20 on this upturn. Strength was higher on the down run than on the upturn. While ADX has inflected, DMI+ (red line) has not and has not cleanly crossed it yet. The down run is not confirmed broken until then.

MACD is clearly below zero. Bearish. Has been bearish (red on top) since that “failure to advance to the upside” 6 months back. Now it is ‘blue on top’ but below zero. That configuration is “counter trend rally in a dropping context”. MACD has to be above the zero line to be ‘bullish run’. So a nice trade upside, but sell at the SMA stack and buy back in later if the run continues. And price is almost touching the SMA line. I’d not be buying Transports here.

But if Transports aren’t “making it” with low gas / diesel / kerosene prices and Christmas Demand, what will?

To me this is looking more like “last call to exit” than “all aboard new rally”. I need to do a few more charts on things like individual sectors and such, but it just doesn’t look all rosy to me.

I suspect the best we can hope for is Obama calling up Yellen at The Fed and talking them into zero interest rates until the election and expand the balance sheet another $Trillion or 2 for The Budget Deal… (only 1/2 sarc;/)

So I guess I still don’t know if the Transports know something the Industrials and the Retailers haven’t heard yet.

But it is sure looking that way to me.

My Strategy Now

I’ve sold out of most stuff. Doing the “duck and cover” until a direction is clear Usually the government does all sorts of stuff to make the party of the sitting president look good in an election year. For the next 12 months, that ought to be the case and it usually lifts the market some.

But this government has been beating this horse for 7 years now. I don’t think it is going to get up and trot now…

China has “fixed things” there (yeah, right /sarc;) and yet reality has not budged. Yet More of the paper fix that doesn’t do much in the real world economy of making things for people to use. I’m sensing a ‘decoupling’ moment…

So until I see some life in metals (especially copper), a bit of upturn in Emerging Markets (including China) and transports booking some business, I’m not seeing much to warm my soul, or fatten my wallet.

Maybe I’m being too pessimistic. Or maybe I just look in my shrinking ‘discretionary spending’ wallet and think “I’ll pay the mortgage and buy groceries this month”… In that context, stocks in the IRA are not likely to go gangbusters… How far below zero can The Fed take interest rates to “juice the market” more, from this point anyway?

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About E.M.Smith

A technical managerial sort interested in things from Stonehenge to computer science. My present "hot buttons' are the mythology of Climate Change and ancient metrology; but things change...
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7 Responses to Transportation Tea Leaves

  1. E.M.Smith says:

    @Larry:

    Interesting articles. A bit more ‘breathless’ than I’d write it, but covers the same kinds of worries.

    I first became aware of the Roll-Up trash game when a small company I worked at got bought. The ‘parent’ proceeded to buy a couple more too. In each case, virtually nothing of the original companies they bought survived. I did site shutdowns on them and most of the people were fired. They kept a couple of nearly worthless patents and some Intellectual Property that they didn’t use (i.e. software for a product they didn’t make anymore…)

    But it made the financials look better and the press was great. FOO buys out BAR and has accelerating growth…

    But it was substantially phoney and mostly leading up to a stock offering as window dressing.

    The influx of cash was nice and I then got to help with the design and build out of a big new campus. (As I was a contractor, not an employee, I was kept around for the shutdowns and build outs) A few years later and a reality moment had them sold to Motorola for $39 Million… I’d place that as about the cost of the campus… Motorola who was then trying to remake itself by doing it’s own roll-ups as the phone market moved away from them… Their stock continued down for a couple of more years before starting to ramp up again.

    I’m now VERY suspicious of any news flow about acquisitions… as often as not it isn’t synergy so much as putting a weak or dying competitor out of business and getting news coverage and loans. Especially if it happens just pre-IPO… or pre-secondary offering.

    Personally, I don’t know how the whole end game for The Fed is going to work. It could be an implosion of sorts as rates get jacked up, or we could be Going Japanese and have stagnation and 0% for a generation. Basically The Fed blew up this balloon, now they get to choose between: Pop it. Keep blowing. Try to gently let the hot air out.

    None of those choices is very good.

  2. Larry Ledwick says:

    Yeah David gets on a rant and he just goes all in but sometimes does some background analysis that I find useful.

    I agree the big issue is literally no one has a clue how this is going to unwind. The one thing I am sure if is it will not be the way most people expect. Probably some off the wall chain of events starts the unwinding. Then postmortem folks will say they could see it coming weeks months ahead of time. That only being true in the context of “if things cannot continue for ever then they must stop” sort of way.
    It is clear to anyone who is paying attention that there are lots of signs and hints that things will eventually come apart the only question as you mention is how and how fast.

    Riding a tiger is fun while it lasts but sooner or later you have to get off or you fall off then it gets really interesting.

    I remember the financial mess in the late 1970’s and early 1980’s and it was a series of small crisis one right after another rather than one big blow out. Given all the people deeply invested in not losing their shirt I suspect that with all the attempts to bail out the boat to keep it afloat just a bit longer that that sort of stair step collapse is relatively likely once things get a good slap up side the head to deflate the confidence this market depends on (even more than a healthy market). That normalcy bias you mentioned in the past will keep lots of folks in the game longer than they should as they convince themselves that either “this time it is different” or that they are smarter than the average bear and can out wit the coming deleveraging and some how luck out in spite of all the signs to the contrary. Unfortunately statistics say that someone some where will fall in a pile of gold plated crap and come out smelling like a rose and will become a legend as the guy/gal that out foxed the balloon bust.

    My expectations are something like this:
    50 % chance of a step wise sequence of crisis each one taking it down just a peg or two but total about 60% loss in value of market and properties as things settle back to historic averages
    25% chance of Japanese style lost decade sort of persistent bleeding with folks just getting used to a flat market and listless economy which resists all remedial efforts and just gradually sags to a new steady state perhaps over 15-20 years or more.
    15% More of the current mess just blowing up the balloon long past when everyone is sure it will come apart with intermittent scares but no real fix or deleveraging.
    7% chance of a 2008 part 2 sort of hard but controlled crash
    3% chance of total melt down with undefined end state

  3. Richard Ilfeld says:

    FUNDAMENTALS. I once had an engineering friend. He claimed he could explain all of structural engineering in a half hour with a wooden yardstick. He felt that failures in the field were because nobody on the team, after the convoluted path to the final product, went back and gave it the ‘yardstick test’.

    How do governments default? They inflate the currency. or, they stiff some creditors and use the police power of the state to suppress them, or, they go through ‘bankruptcy’ and everyone has to tighten their belts a lot, or there is a revolution.

    The economy consists of stuff, extracted, grown and made, and the distribution of same. We have added lots of folks who get some stuff and don’t contribute proportionally to the extraction, growth, or production of same.

    Essentially no growth has made the actual economy the zero sum game that progressives have wished for for the last hundred years. Like any dog that catches the car, they have no idea what to do next, as their idiocies have been dependent on that which they have now inhibited.

    If we don’t produce more stuff, each of us will have less. The strong will have less less than the weak.

    If we kill our defenses, we will discover that even though we have less, we have more than many. Those with less want to take our stuff. ‘Sharing’ under these circumstance, even if dress up in fancy rhetoric, is appeasement. It never ends well.

    The current maelstrom of detail is hiding some fundamental realities.

    Things won’t get much better until we are more interested in going to mars that having boys use girls locker rooms. People confused about gender shouldn’t run the economy.

    So I am ignoring the charts and trying to invest in things that are likely to still be around and have value when all this shakes out, hoping that some respect for private property survives the shakeout.

  4. E.M.Smith says:

    @R. de Haan:

    I’d love to watch the video in that link, but even with page reloads it insists on shoving a PopUp in my face (even though my browser is set to block pop-ups) and demanding I click the close box.

    As clicking anywhere can cause execution of Javascript that can then do all sorts of not so good things, I don’t click… The end point being that I’m not going to see that video on their page. Or read much of anything else on their site as long as they have persistent obnoxious obligatory in your face pop-ups. Sorry.

    Maybe I’ll make a ‘special chip’ for the R.Pi that is just for looking at sites with crap policies and obnoxious pop-ups… reset it after any use… Maybe someday….

    @Larry:

    Two things worth watching / adding to the mix of concerns:

    1) Demographics. Demographics is Destiny. Fundamental truth. The USA is headed to a big retirement bubble of Boomers. That means a LOT of ‘cashing out’ of investments of all sorts. China is hitting the Demographic Wall of their 1 Child policy (and just realized it, changing to a 2 child policy… unfortunately, when you SEE the effect, it’s at least 20 years until any change is old enough to have effect in the job market…). They are staring a shortage of workers in the face and a generation of Singletons that must support 2 parents and maybe 2 kids along with themselves. So 6 to carry… That’s gonna hurt.

    2) The Destructive Debt Monster. More on that in a posting in about an hour… but essentially the entire world has gone on an insane debt explosion based on the “Progressive” notions of “Modern Economic Theory” (that isn’t modern and is just a name for out of control debt that’s been tried for a few thousand years). IMHO, there is a very good case for the entire Globe “Going Japanese”…

    Now mix those two, season with expanding nuclear weapons states, top with a layer of Russian Expansionism, and bake for a decade at 0% interest rates… It either blows up the entire oven, or the thing expands into souffle foam then falls and burns to a crisp. I don’t see any case that ends with a nice dinner for all around the table…

    @Richard:

    See the above two fundamentals…

    Economies grow most when populations are growing and when freedom dominates. There isn’t any place in the world with those things.

    Economies stagnate and die when populations age and shrink, when the government is the major source of money, and when freedom fades.

    Islamic world is dominated by the last two, despite population growth. EU is some of all three. USA is the first, working on the second, and shrinking freedoms as fast as the Progressives can shout “FORWARD!!! off the cliff…” Africa has never had much of #3, and #2 has been an issue there. Latin America is having declining birth rates, rising government intervention, and ever less freedom (largely reflected in reduced property rights and the tendency to steal corporate assets). Asia isn’t really any better for most of it. India is more neutral than most, there, but a mess of it’s own with too much government. China has been the ‘engine of growth’ from strongly reducing government and increasing private enterprise, but that Demographic Wall, 35 years in the making, has now hit. Add that freedom there is stalled and perhaps reversing to their prior tendencies. Russia had a brief flirtation with free enterprise and freedom, now returning to feudalism with Czar Putin.

    There are a very few bright lights. Many in Eastern Europe. Moldova and Czech Republic both “get it”; but are hardly large enough to move the world. Similarly some small island nations and a few trading dependent areas (like Hong Kong – now under the Chinese Thumb) and Vietnam has been doing great on the rise out of the Communism variety of Socialism.

    My expectation is that a graph of demographics, freedoms, property rights (rule of law), low debt (and low taxes – see property rights…), and a ‘regulatory burden’ index (proxy for overall government size, or perhaps the other way around) would pretty much show the prospect for any economy in the world, and for the Global Economy in aggregate. But I’ve not worked out a “Drake Equation” for it. Yet…

    nD x mF x iP x jB x kT x oR = Probability or Prospects for growth

    As a first cut. Where the lower case letters are coefficients of scaling (weighting) and the upper case are the parameters of interest. Would take a bit of work to get those numbers ‘close enough’, but a few sample cases would likely get close.

    D = Demographics
    F = Freedoms
    P = Property Rights
    B = Borrowing or Debt Burden
    T = Tax Rate / Total Tax Burden
    R = Regulatory Burden

    Some might be harder to ‘get right’, in that a single simple coefficient may not be correct. Take debt. At very low levels, a little debt can let you do things that move you rapidly along the development path. At high debt levels, add all you want it just makes things worse, never better. So some of those might need to be a bit more formulaic than just a plug number.

    What I’ve focused on here as most important now is the D, B, and T problems. F, P, and R are also very important, but moving more slowly and less global in nature (though things like the TPP and similar ‘trade treaties’ are making R and F more global in reach as they curtail what a free people can do via their own governments…)

    So that’s my 2 ¢ worth…

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