The Dow Jones Transportation index declined over 1% on Thursday versus the Dow Jones Industrial Average climbing 0.86%. The challenge is the discrepancy goes back further than Thursday’s move. In fact, the Transports have been lagging the Industrials for more than nine months. Since the July high in the Transportation index they have been lagging. The Dow Industrials hit a new bull-market high in early April and are in position to break above those highs again. Why should we be worried about the Transports? They are a leading economic indicator and have been watch by many for years as such. The current discrepancy begs the question… how do we continue to make new highs if the transports are lagging?
It would be easy to dismiss this as an old theory and say it doesn’t work that way any more. But, the reality is goods have to make it into the stores, warehouses and your house somehow. Goods are transported to all the locations around the world to be sold. That is why transports are consider a leading economic indicator. In fact, if you look at the chart of the Dow Jones Transportation index and compare it to the chart of the economic data reported, you would find similar trends. The key economic data has been lagging over the last three to four months. The GDP has been steady at 2-3% growth, but basically flat. The ISM manufacturing data has been up and down as well. The point being, transportation stocks are reflecting or confirming the economic data. Thusrday’s move in both indexes is just a obvious example of what has been building.
There is not conclusion at this point only a discrepancy. It is a warning sign of what is taking place in stock prices versus the growth of the economy. If the discrepancy continues to widen then the concern will grow. Worry creates fear and fear creates volatility. Volatility generally leads to selling and you know how the dominoes fall. On the other hand, if transports start to rise and fall in line with what is happening with the DJ Industrial Average and the S&P 500 index, it could be a confirmation of the current move higher and a return to the uptrend off the October lows. The discrepancy is a warning not a conclusion.
The trader in me wants to sell and watch what unfolds from here. However, the investor wants to believe the fundamental improvements in earnings and the outlook are reason enough for the S&P 500 index to move back towards the 1550 high of 2007. Resolving that conflict is a matter of discipline in how I manage my portfolio. Yes, you can have both strategies deployed in your portfolio. The challenge comes in sticking to the discipline of why you bought each position. If I own SPY, SPDRs S&P 500 index for the longer term outlook, I have to maintain that outlook and not allow the short term volatility to change my discipline towards that position. Likewise if I bough Amazon as a trade into earnings and it is up 10%, I have to manage my trade and not fall in love with the stock. Don’t let your emotions change your objective. Thus, for now we hold our longer term positions based on the objective and tighten our stops on our short term or trade positions as they approach their target objectives.
Today the first quarter GDP is announced and many will be watching to confirm their collective beliefs that the economy is growing. A bad report will not be accepted well. Amazon beat expectations after hours and is up more than 10% in the pre-market. Watch to see if has any impact on the broad markets. Not likely to be an Apple influence, but it should help the retail and consumer sectors. Stay focused on your discipline and manage the risk of your positions.