Recent weakness in a major U.S. stock index has some experts and investors calling the bear out of hibernation.
The Dow Jones Industrial Average probably is more closely followed than any other market indicator in the world, but the index creating the stir is the Dow Jones Transportation Index.
The creator of these indicators, Charles Dow, saw them as a means to get a quick understanding of the general economic conditions in America. Today, market analysts combine the two into a market style called Dow Theory.
Movements in the averages are used to determine future price moves for the overall market. And the transports have been up to something recently that people think will lead to price weakness in the general market in the near future.
A lot of market sectors put in strong performances from July lows. The move was good enough to push the Dow Jones Industrials and a few other indexes to all-time highs. The transports also bounced, but by the time market momentum stalled in late November, they hadn’t found their way to a new high. And over the past five weeks, it’s been the worst-performing major sector.
It was the first to break through its 50-day moving average (joined in recent days by Nasdaq) and it’s been sliding since. The stocks are falling because the business of moving people and stuff soon will slow down.
But as I’ve long said about stocks, they are a great predictor of the future. It’s the amplitude they often get wrong.
There is no doubt in my mind after watching the transportation stocks that the industry soon will experience a slowdown of some sort. This slowdown will catch a lot of people off guard, and that’s why experts are saying it portends greater weakness across the board.
I have a feeling, though, that while business will peel back a little from the last few years, it will be nothing more than a shortterm hiccup. Action in the rest of the market since July simply has been too strong to lead us into some kind of a recession (which is what others are suggesting the transports soon will be doing).
What about the ability of the transports to predict other market prices? The last two years have called the reliability of this tool into question. In 2004, the transports were up 28 percent and the Dow Jones about 8 percent. In 2005, the Dow finished up less than 3 percent and the transports climbed 25 percent. Maybe 2007 brings this back into balance a bit.
Investors should be aware, however, that the rest of the market has been following the transports and may continue to do so, at least in the short term. A little caution is warranted as prices could weaken further into early January.
I will be using the correction to add to positions and get into a few sectors that I didn’t want to chase a few months ago. At some point in the next four months or less, the recent market highs should be surpassed on a broad basis. Getting ready now will enable you to profit from the coming move.
Hauke is the CEO of Samex Capital Advisors, a locally based money manager. Views expressed here are the writer’s. Hauke can be reached at 829-5029 or at email@example.com.