We’ve been watching the Transports alot lately; We noted the Transports at Crossroads last week; this week, we took notice of Those Amazing Transports.
Historically, Markets have seen trouble when the Dow Industrials made new highs unconfirmed by the Transports. Last week’s action in the Trannies now eliminates that concern. What would resurrect it? A pike in energy prices driving the Trannies back down — and leaving a DJTA double triple top behind.
Note that the trasnsports themselves are not free and of potential headaches. Late last week, Dan Gross noted The mysterious trouble in the trucking industry.
Jim Cramer went even further. Never one to shy from controversy, Cramer stated that the strength in the Economy was "vastly overstated" by actual data releases (GDP, ISM, etc.) He he also stated the Trannies are
running due to collusion amongst the rails and airlines over prices. Even more aggressive,he called the US Anti-Trust Department defunct, implying it has become a toothless tiger. If his bud NY Gov Elliot Spitzer ever becomes President, perhaps we will have anti-Trust enforcement again.
I’ll be very curious to see what Richard Russell’s take on this will be . . .
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UPDATE February 5, 2007 10:17am
Here’s a quick chart on the Trannies:
Break Out, or Triple Top?
>>
Sources:
Dow Theory Seems in Play for Some Bulls
Transportation Average Joins the Industrials At a High; More Gains?
E.S. BROWNING
WSJ February 5, 2007; Page C1
http://online.wsj.com/article/SB117062874434897614.html
DJTA Components
http://www.streetauthority.com/terms/index/transportation.asp
Dump Truck: The mysterious trouble in the trucking industry.
By Daniel Gross
Friday, Feb. 2, 2007, at 3:29 PM ET
http://www.slate.com/id/2158873
Alright, it’s early, but “markets have SEEN” not “have SAW”.
A (S)PIKE in energy….
I know you must be spitting this stuff out very fast….but we want you to look really good. Not just brilliant, but exceptionally so.
~~~
BR: lol — Fixed, thanks.
“I’ll be very [*] curious to see what Richard Russell’s take on this will be . . .”
*incredibly
do the utilities have anything to say???
May be this could help?
In the period of 1987 BC (before crash) there has been some odd movements in the Hong Kong stock markets, which only became evident after facts, the upsurge of volume in the stock exchange which impact, was not visible when reading the downward variation of the stock indices.
The indices were slowly going down until it plunged down by 27% in one day,fifty percent in a month.
At this time the use of futures were just at infant stage and sell/purchase of volatility waiting to be in existence; the operators were merely selling two stocks for one purchase of the same stock.
Today large sellers or buyers can apply the same strategy but using derivatives coupled with the purchase or sale of the underlying asset in multiple suiting prices and indices target.
When looking at the « Hedge fund watch » as published by Société Générale they are some striking observations:
Speculative funds had a significant presence on the long side of the SP500 in the years 2000/2001 and were net sellers after, until they reintroduce themselves as net purchasers in 2006/2007 but in volume recorded during this contemporary period at least four times higher now than ever before.
It will be no surprise to know that they are large sellers of volatility since September 2006 through January 2007 and had left the volatility to itself from June 2006 until September 2006, they were less significantly on the sell side of the volatility during the first quarter 2006 when shares volumes purchases were higher than the last semester.
As a conclusion, a truism, there is a large vacuum that is filled through derivatives and may represent the potential of volatility when markets will be left to the net physical assets purchasers, whom are shouldering the real assets holdings.
As a thought, the true measure of market’s « future » volatility should be an inverse relationship of the actual variance recorded by the financial markets indices, when knowing that they are groomed like a sanatorium.
Jim Cramer went even further.
Right. He’s even agreeing with Gary Shilling that most inventories are too high, and that there’s serious overcapacity in the (erstwhile) Big 3 autos.
Philippe:
For every buyer there is a seller so who is the smart group even if ‘they’ could be identified? How do we (you) know who has been large net sellers/buyers of any of these instruments? When you say, ‘It will come as no surprise..”, the surprise is that anyone really knows.
I wonder how itunes and such figure in the tranies. Anyone computing electronic transactions in Dow theory?
Barry,
You mentioned Richard Russell’s take on the Dow Transport non-confirmation. It brought to mind his recent remarks in which he compared today’s situation with the non-confirmation witnessed by Rhea in the 1930s.
I see that the Mark Hulbert article you’ve linked to contains those quotes, so anyone who would want to hear Russell’s viewpoint should check out that Marketwatch article.
Also, you may have seen Russell’s more recent comments about the S&P 500’s relentless upward march. Today, Russell included a monthly closing figure chart of the SPX going back two years. He noted that the S&P had finshed up on the month in over 80% of the monthly periods since Nov. 2005.
Thoughts?
Sentimentrader.com pointed out today that we have had 11 “Dow Theory Signal” confirmations since 1997. The last one was early May 2006. That wasn’t a very good time to load up on equities.
Turns out that only 2 of 11 occurrences have seen the Dow up more than 3% one month after the Dow Theory confirmation. Five of 11 occurrences have seen the Dow down more than 3% one month later. Looking out 3-6 months, the returns look like any random, historical 3-6 month return.
In short, the Dow Theory Signal hasn’t meant anything over the past 10 years, except the likelihood of s/t selling pressure.
Not surprising given that this now-useless indicator was originally ginned up back in the 19th Century.
The transportation index may not be a conspiracy, but it’s level may be an anomoly. Isn’t that what Cramer is saying? The huge speculation and M&A activities has artificially supported high Transport company share prices. What would the TranIndex be otherwise, based on tonnage carried in the real world? That’s the question, isn’t it?
I think Dow Theory needs to be understand and applied properly. No one ever said the Transports confirming a new high of the Industrials implies a great bull market lies ahead. Surely not Charles Dow, nor Robert Rhea nor Richard Russell.
It must be applied with liberal use of one’s noggin. The Transports & Industrials confirmed the very month the 1929 debacle started. IN other words, if one applies a rule that whenever they confirm, it means a bull market is dead ahead were wrong nearly one hundred years ago and they are still wrong today. It still works. One just needs to know how and when to use what Dow, Rhea and others developed.
Norman
When there was volatility through absentees, the stock markets were very substantially down (June/July).
I am not trying to identify a group, as opposed to the historical abnormal (in a statistical sense) large amount of derivatives dealings on the long side (net open position)during this period and their outcomes.
I do wish I could remember where I saw it on the web, but there was an article about these two guys who are like the only surviving traders from October ’29. Anyways, these guys said that the pattern in the DJIA/DJTA divergence/convergence was the same in the year of the great crash.
Initially, the Trannies diverged lower as the Industrials powered ahead on pure speculation. Then, as irrational exuberance got to a fever pitch, the Transports themselves became victims of the hype. When the two came back into equilibrium (like Feb ’07…) is when the bottom fell out.
Did anyone else see this article? The idea makes perfect sense to me.
We noted a very interesting bullish potential in the breadth analysis of the transports last nite and it certainly delivered today. Some readers may find it interesting –
http://blog.successfulonlinetrading.com/2007/02/12/stock-market-breadth-report-for-february-12-2007.aspx#
good trading
all at http://www.successfulonlinetrading.com