What Happens After Double Tops in the Transports?

Let’s take a look today at a pair of charts via Birinyi Research to help answer that question.

The Dow Transports have recently formed a double top:

Source: Birinyi Research — Chart of the Day


What happens after the Transport double tops? Birinyi looks into that question, using these critieria:

• First peak is a new 52-week high
• Correction between first and second peak is at least 5%
• Duration between first and second peak is less than 120 days
• Second peak is within 2% (Plus or Minus) of first peak

How does the overall market respond following double tops in the Transports?  Below is a composite chart depicting the performance of the Dow Transports and the S&P 500 following the second peak of a double top in the Transports.

click for larger graph


Source: Birinyi Research — Chart of the Day


The subsequent SPX sell off averages 5% within 50 days percent of the total move (median length:  240 days) — while the Transports can be expected to lose considerably more on average. Trannies saw declines ranging from 5.9% to 45.9%.

As the chart details, the two indices have similar patterns, although the S&P 500 declines by a lesser extent than the Transports, and the S&P 500 tends to bottom ahead of the Transports.

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  1. Dave commented on Jul 31

    How many times were the criteria of the double top in the $TRAN met between 1960 and now?

  2. ss commented on Jul 31

    Interesting. I would, however, suggest adding an additional screening of this data. Take a look at this move whenever the second Trannie top is within a month or 2 of the end of a Fed rate hiking period. I imagine it’s alot closer to the move the S&P made in 1995….a melt up.

  3. Barry Ritholtz commented on Jul 31


    Dave — 14 Dow Transports ‘Double Tops’: 1960 – 2006


    Average -19.18 631
    Median -13.30 240

    First Peak Second Peak
    Duration Between Second Peak
    and Next New High (Days)
    Date Percent Correction
    Between Peaks
    Duration Between
    Peaks (Days)
    Maximum Decline Following
    Second Peak (%)

  4. Michael C. commented on Jul 31

    I’m not sure if I’m reading this correctly, but here’s what I have.

    2nd top for the DJT was 7/3/06. At that time SPX was around 1280.

    From the chart, it looks like the SPX already hits its max decline on day 12 at around -5%.

    So from the 7/3/06 double top on the DJT, that would have had the SPX bottom at 1216 around 7/20/06 with a retest after 2 months.

    The SPX so far bottomed at 1228 on 7/14.

    From the Birinyi research & chart, it looks like the SPX has put in more of a bottom than a top? Were we supposed to take home the opposite meaning?

    Not sure I’m reading this correctly…

  5. jab commented on Jul 31

    Sort of unrelated but I wanted to throw this out. If the market does not move tomorrow on good volume then there will have been no follow through on the 7/19 move. It will be 9 days and on the three biggest volume days since then the market was down on all of them albeit slightly on one day. Point being many have talked about wanting to see a follow through within 9 days on good volume to see a bull market. If this is what you want tomorrow is do or die.

  6. Craig commented on Jul 31

    I lost count, however, her’s the lates from IBD:
    “For the week, the Nasdaq advanced 3.7%, its biggest price gain since the first week of the year. The S&P 500 climbed 3.1%. The Dow pocketed a 3.2% gain.

    But the market’s day-to-day action calls those gains into doubt. The major indexes twice posted large gains in weak volume. Combine those two divergent sessions with Thursday’s distribution day, and you get a market that’s not showing much conviction.

    The market fares best when price and volume move higher in tandem. When stocks grab big price gains in light volume, that’s a sign that institutional investors aren’t buying shares with any kind of intensity. Without that institutional support, the market may be vulnerable to a pullback.

    The big picture remains the same. The market is still in a downtrend.”

  7. Alaskan Pete commented on Jul 31

    SS, my ultrabullish friend….if you add enough screeening criteria you may get the result you want…but at the expense of reducing the sample size so small as to be meaningless. 14 is already a tiny sample size.

    And further, how do you define “within a month or two of the end of FED hiking period”. After all, how do we know this particular double top falls in one of those periods..they ain’t stopped hiking yet. And even more…how do you define the “within a month or two”…does that period window start on the last hike, or the first pause, or the first cut or…….

  8. BDG123 commented on Jul 31

    How about this screening. The trannies have been this oversold only two times in eighty years. One led to a 95% decline and the other to a 45% decline.

    But, I’m just a little schmoe who’s been harping on this for five months.

  9. appc commented on Jul 31

    SS ,
    quit being bullish
    only bears allowed on this site !!!

  10. diva commented on Jul 31

    The Fed is no where near ending hiking.
    (wrong as that might be)
    All of the inflation indices will continue UP for the rest of the year……. and beyond.
    They may ‘get brave/scared’ and pause somwhere along the way…….. but you can bet on plenty more wrong-headed rate hikes to come.
    They should have stopped a year ago (or before).
    The current inflation is the fault of crappy Fed open market operations.
    Read my lips.
    We shall watch this mess together.
    ……will they EVER learn?

    you guys will NEVER see this in the ‘mass media’.
    …..but, there are plenty in the know that know.
    Pay attention.

  11. diva commented on Jul 31

    sorry about the double posts (technical issues?)

    I really enjoy all posts by Alaskan Pete, whiplash, and even BDG123 (among others)

    …..however, I reserve the right to disagree with you when I disagree.

    I’m gonna tell it like I see it.

  12. whipsaw commented on Jul 31

    diva, I understood you to say that more rate hikes are forthcoming and that inflation will increase, but you lost me on the part about how rate hikes should have stopped a year ago? If inflation will increase, why would stopping rate hikes have helped?

  13. whipsaw commented on Jul 31

    per ss:
    “nteresting. I would, however, suggest adding an additional screening of this data. Take a look at this move whenever the second Trannie top is within a month or 2 of the end of a Fed rate hiking period. I imagine it’s alot closer to the move the S&P made in 1995….a melt up.”

    ss, I can never quite decide whether you are a 20 year old Young Republican troll with no money in the market at all or just somebody who is completely upside down and about to lose his money after having bought a bunch of Iraqi Dinars over the internet on a credit card. In any case, you apparently have no idea of what is going on, either by education or design and I would encourage you to read the articles on minyanville.com for a week. That’s a pro site and those guys will trade either side of any thing at any time, but the overall sentiment is that you are about to get a lesson in economics and finance. They could be wrong and I could be wrong, but I have money on the table that says I am not. Do you? I doubt it.

  14. whipsaw commented on Jul 31

    per diva:
    “I really enjoy all posts by Alaskan Pete, whiplash, and even BDG123 (among others)”

    Thanks, but bear in mind that enjoyment and actionable trades are different things. You have your framework for viewing the world and I have mine and Wall Street has another. Plus Alaskan Pete is apparently actually a Georgia Boy like myself and you can take that as good or bad. :) Don’t know what to make of B, but he/she is always interesting.

  15. retired commented on Jul 31

    whipsaw: would you be in bonds as a safe haven, mutual fund vehicle, getting decent interest with possible upside?If apparent consensus of recession grows, then won’t sentiment be favoring lower yields and higher bond prices? Or, is there downside risk, ie, if the fed does have one more move, bond prices will get hit hard before moving up?

  16. diva commented on Jul 31

    whip –
    (since I mix up my saws with my lashs)
    to keep it short:
    1. higher Fed rates have no direct correlation with decreased money supply
    2. higher rates slow down the transactional economy and hence decrease the demand for ‘cash’
    3. same cash and lower demand for same = monetary inflation (duh)
    4. Fed increasing rates has increased inflation the entire time they have been increasing rates…….. which is becoming obvious in even the lagging cpi/pce data now (has been VERY obvious for some time in all of the leading inflation indicators like commodity prices – and you can throw out oil all together)
    5. I’ve known this for over a year…… and even have known what the pce/cpi indices would be each month since Feb. No surprises yet…… and, guess what!?
    higher indices to come for the rest of the year….. and longer
    no wonder I say the Fed are idiots! I DO know of what I speak.
    Current monetary policy via targeting rates is an obscene joke.
    Higher rates to slow the economy will NOT reduce monetary inflation. BB IS an idiot if he thinks that.
    What the Fed is doing is creating inflation. [correction: they HAVE been creating inflation for over a year]
    AND creating unneeded economic hardship for a lot of innocent folks.
    Like I have mentioned before…… if more people understood what was going on…… it would be stopped.

  17. brion commented on Jul 31

    sing it whipsaw. I almost posted that perhaps ss should “retire” from BP (disability?)
    I second Diva in her fav Board members (though her? own posts/prognostications seem cryptic and Randian to me personally)

    Sometimes I think it would be nice to turn BP and the above mentioned posters (+ Barry of course) into a podcast (audio or video)–now THAT would kick ass imo.

    Barry-What say ye?


    BR Sounds interesting — the technology is pretty easy — maybe we could have a roundtable.

  18. diva commented on Jul 31

    whip – as a KY girl married to a South Carolina guy….. and living real ~close~ to you – here is a repost from the GDP string you probably did not see:

    Dear juan:
    Please smell the coffee
    The Fed has absolute and complete and total control over the amount of ‘non-interest bearing debt’ of the Federal govt = cash.
    No body else can create ‘cash’ except the Fed.
    ‘cash’ is needed by the transactional economy. No one holds on to cash…… because it does not pay interest. When folks deposit/invest their ‘cash’ into an interest-bearing instrument….. it is no longer ‘cash’ (non-interest bearing debt)
    The Fed has several different ways it could manage just how much ‘cash’ it provides the economy.
    Today the Federal Open Market Comm uses targeted interest rates to determine how much ‘cash’ to provide. This is a crappy blunt indirect ineffective operating mechanism. There have many different papers written on this…… and published.
    At the end of the day….. the Fed either buys or sells Treasury Bonds to create/extinguish ‘cash’.
    However……. they *could* use a better control mechanism……. if they so chose.
    They do not choose to do so…….. so we all get to go through times of inflation (or deflation as in 97 thru 02)
    This is stupid.
    Inflation and/or deflation are always and only due to poor monetary controls. (by our own dear Fed)
    Welcome to the Feds latest round of inflation.
    Send them a thank-you note!
    (and add a PS to thank them for the next recession that they want to induce in order to reduce the very inflation THEY created)
    I still can’t believe people put up with this crap.

    Posted by: diva | Jul 30, 2006 1:14:21 AM

  19. diva commented on Jul 31

    and, chuckle, chuckle…

    BB is a nice South Carolina boy too

    oh dear

  20. rick commented on Jul 31

    “”The market fares best when price and volume move higher in tandem. When stocks grab big price gains in light volume, that’s a sign that institutional investors aren’t buying shares with any kind of intensity. Without that institutional support, the market may be vulnerable to a pullback.””

    This is the summer time, the volume will not be there until sept.

  21. Alaskan Pete commented on Jul 31

    Diva honey, maybe write out the Kentucky part next time. The “KY girl” probably generates unintended visions of a certain JNJ product (just a lame joke, hope I didn’t offend, but that was a slow pitch right down the center of the plate).

    Thank Nixon for closing the gold window. “We’re all Keynesians now”.

    FED operations are not my strong suit by any stretch. But it would seem to me that the explosion in pooling/securitizing mortgage and other debt, combined with fractional reserve banking practices, has really played havoc with their ability to control the supply. Looking at “money” without simultaneously looking at credit and credit creation mechanisms paints a very incomplete picture, IMO. Perhaps they should monkey around with reserve requirements instead of rates. Or maybe that would be a terrible idea, I really don’t know.

    My take could all be gibberish, because central bank operations (such as the sterilization Roubini talked about in the New Bretton Woods paper) are pretty murky to me. I was an engineering major, not finance.

  22. diva commented on Aug 1

    LOL AP! (re the jel)
    That was a first.

    As for your skirmish into the murky waters of bank-land……. don’t worry about it. It’s all N/A. The Fed has total control over their balance sheet. Credit issues are non-issues at the end of the day.
    ……step away from all those trees – and see the forest!

    And…… I love ‘gears’ – I’m a EE/MBA myself. What flavor are you?
    (we may know some of the same people)

    ……more to be revealed…..
    gotta run for now

  23. whipsaw commented on Aug 1

    heheh. I’m not sure why any of you care what I have to think? I come from a long line of Scottish fortune seelers/makers/losers who built up this country.

    I do understand things on a macro/politcal level, but am not the guy to guide anyone because, thru the Miracle of Inheritance along with a bad attitude, I can survive pretty much whatever comes along. So don’t pay any attention to me unless you are in the same boat.

  24. Alaskan Pete commented on Aug 1

    I’m the MS Civil/Environmental flavor courtesy of the North Ave Trade School (whipsaw will get that if nobody else does). But I missed that miracle of inheritance (got the bad attitude though!). I come from poor white trash, old Georgia cracker stock. Literally one generation removed from sharecroppers and moonshiners. First gen college grad and all that. So if I screw it up, I’m going hungry. I think my inheritance is an acre of kudzu covered land in a holler with a rundown single-wide on it. Pretty good incentive, all in all. And ditto what whipsaw said, don’t pay attention to me ’cause I ain’t feedin’ you when we’re both poor.

  25. Dave commented on Aug 1



  26. ss commented on Aug 1

    World according to Whipsaw:

    Bullish = Republican = dumb

    Got it….thanks for clearing that up.

    I was a charter Minyanville reader…until they led the critters off a (short) cliff in March ’03. My clients went the other way. They are smart bears, with a certain gloom and doom that makes Barry look bullish.

  27. Cherry commented on Aug 1

    Republican? Bullish for what, a failing economy you are trying to deny? You constantly come on this board and use the same language, yet you consistantly miss the world. Sad for you, denial can be a hard thing to overcome.

  28. Barry Ritholtz commented on Aug 1

    For the record, I am bearish for this year
    I was Bullish in 2003
    In January 2004, I flipped bearish
    I then flipped (for a trade) in each month March April May June July of 2004.

    As Colbert says, how can we trust the facts when they are biased?

  29. phil commented on Aug 1

    bullish on ritalin and prozac after reading these posts

  30. Amos Newcombe commented on Aug 1

    The second graph is (almost) worthless. The vertical axis — I’ll give you the difference in origin, because mentally translating a graph up or down is not a difficult exercise, at least for sophisticated quants like us. But two different scales? When both graphs are stock indices? Is 2 a standard beta for the transports vs the S&P? Or was it chosen to make the graph look good?

    Then there’s the horizontal axis. No caption. Even our host, who brought us this graph, got confused as to what that meant. So now we have fourteen samples from each series, which are time-compressed by varying amounts based on somebody’s judgement about how long the run was, and then averaged together.

    And no indication of variablilty within those 14-sample averages.

    The graph confirms that double tops in one sector are typically bearish for the market as a whole. And far be it from me to say that obvious things don’t need confirmation. But the specific quantative conclusions in the post? Overreaching, based on a flawed graph.

  31. babycondor commented on Aug 1

    Thank you Amos. I was wondering why nobody had commented on the missing legend for the horizontal axis.

  32. Wir commented on Aug 1

    Amos ,
    Good comments there . It’s
    typical of many graphs and diagrams that people use to back their inherent biases. Torture the numbers enough and they tell whatever story you need them to say …..

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