NOTE: This Market Commentary alert was originally emailed to subscribers at Ritholtz Research & Analytics on Mon 11/29/2006 4:23 PM;
This is posted here not as investing advice, but
rather as an example of an analytical call for potential subscribers. We
expect to post future advisories in a similar manner — after the call,
but in the correct chronological location here in the blog.
Earlier this morning, we looked at the ATA tonnage index for October. Truck Tonnage dropped 1.8% in October. The index decreased 4.0% compared with a year earlier, making this the largest year-over-year decrease since February 2001. Year-to-date, the truck tonnage index was down 2.1 percent, compared with the same period in 2005.
Rosenberg, Merrill Lynch’s chief North American economist, called it "borderline recessionary."
What might this mean for the markets? To answer that question, we took a closer look at the DOW JONES Transportation Index (TRAN). From a Technical perspective, it is now nearing a very critical juncture — and is likely to make a big directional move soon. (See our Technical Review of the Transports at the RR&A site).
While we have been fairly steadfast in saying its been too early to short equities, any technical break in the Trannies will be the first of our signals to place a bet against the equity markets.
Divergence: According to classical Dow theory, when the Dow makes new highs, we look for the Transports to confirm them. To oversimplify, we want to see more than goods just being manufactured, we want to see them shipped to retailers and sold to the end consumer. That should be reflected in the Transportation Index.
And its not.
As you will see in our technical review, the Trannies have failed to eclipse significant resistance at the 5,000 level — on three different occasions. Further, the upwardly revised GDP should have been welcome news on the economy, including the Transports; Instead, the group sold off, and closed near the session lows.
Thereis a valid, secular uptrend line for the transports at ~4,400. A violation of that level would be extremely negative, not only for the group, but also for the market as a whole. It would signal more than a mere slowdown on the horizon. Amd if we learn that additional inventories are building, it would suggest the truck, air and rail companies are delivering inventory draw downs, as opposed to customer driven demand for goods.
Either way (bull or bear) there are two significant TRAN levels to watch: 5,000 and 4,400. The former suggests a continuation of the bull trend, while the latter would be a significant reversal — and a time to begin placing index short bets.
My instinct tells me the soft landing crowd still has another rally left in them. Given all the liquidity thats circulating, this is certainly possible. But regardless, we are watching the Transports very closely for a technical signal.
In the Transport research piece, we examine the index more closely and list the technical rankings of each index member (0 to 100 scaled, 100 – the best, 0 – the worst).
November 29, 2006