Nothing has been more confounding during this equity rally than the weakness in the underlying fundamentals of the transports. Without fail, the data from the transports has been an excellent leading indicator in past recessions. Warren Buffett has even admitted that the rail data is his single favorite indicator to watch. But as equity market have ripped higher, the rails and other transports have lagged.
Of course, as time has passed we have witnessed the enormous influence of government stimulus on the economy and the incredible impact of money printing on asset prices. As we begin to see signs that government stimulus is failing to generate jobs and a sustainable recovery, the transports continue to forecast a very weak recovery. Have the transports been right this whole time or is the Fed’s liquidity induced rally a more accurate reflection of the economy?
Late last week, Union Pacific CEO Jim Young said the economy had stabilized, but was not recovering just yet:
“So, it looks like the economy has bottomed out, but unfortunately we’re not seeing an upturn yet.
The weekly rails data we report has shown certain signs of stability and even a slight uptick of late, but whether this warrants the extreme recovery optimism we hear about on a daily basis is highly suspect:
Of course, the weakness in the transports isn’t just in the rails. The Air Transports reported a 13% year over year decline in cargo just last week and the latest truck tonnage data shows that the recovery in trucking is also very weak:
In terms of market implications, Richard Russell is now growing very concerned about the action in the Transports:
“From a Dow Theory standpoint, the Transports are now worth watching. They’re sort of sinking out of sight on higher volume. And look at MACD which has now turned bearish. Transports could be a problem. And note today’s plunge of over 100 points.”
From a trading perspective, we saw heavy put action in the Transports late last month as they were beginning to top out. Since then, traders have become very concerned about a potential double top leading to further weakness in the transports sector.
The fundamentals seems to rhyme with the technicals. Some traders couldn’t ask for a better set-up….
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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