At The FRED Report (
), one of the questions we have had in recent days is about what
is currently saying about the markets. Readers will recall that our initial June 17 article (
) suggested that fears of a double dip recession were likely off base. Since that time, stocks have rallied as we forecast and talk of a double dip is receding.
Dow Theory suggests that the Dow Industrials and Dow Transportations have to move to new highs or lows to confirm a trend in the markets. Since the stock market can forecast the direction of the economy it follows that rallies in both indices are a precursor to economic strength, and a non-confirmation can suggest a change in the economic trend. The best example of this in modern times is the 1998-2000 time period, when the Transportations peaked in 1998 and the Industrials in 2000. That forecast a recession, which in fact came to pass. Note that this non-confirmation can exist for a while before there are any deleterious effects. And indeed the longer it lasts, the worse it can be. This time period also points out something we mentioned in our "
Double Dip Recession
" article -- that when the Transportations are leading, the condition of the market is healthier.
The above becomes important when we look at the current charts of the DIA (Diamonds Trust Series) and IYT (iShares Dow Jones Transportation Index), two ETFs that represent the Dow indices. Notice how the IYT has started to lag the DIA since September 2010. This suggests a slowing economy (not exactly a surprise, but it IS a concern), unlike the conditions at the lows back in June/July of 2010. Should this condition persist for the next few months it would become more of a concern.
When looking at indices or ETFs, it is often helpful to look at component stocks in an effort to glean what the indices are actually saying. In that light, it is worth noting that KO is one of the stronger Industrials' components. Much of KO's business is foreign and many institutions buy the stock when they have concerns about the dollar and inflation. This would seem to be the case here.
In addition, energy stocks such as CVX (Chevron Corp.) are outperforming the DIA, again suggesting inflation.
This suggests that growth may be coming from abroad, rather than domestically.
A look at a couple of the transportation stocks tends to confirm this view. The chart of FDX (FedEx) is performing in line with the IYT, while JBHT (JB Hunt Transportation Services) is weaker than the IYT. FDX is a multinational company, while JBHT is largely domestic.
The conclusions we draw from this are: (1)
stocks with multinational exposure seem likely to do better in a year-end rally
inflation still should trump deflation
. And (3)
there are more signs of economic weakness now than in the summer
. With regard to "3" it is too early to suggest real trouble is on the horizon (we doubt it is), but we will watch carefully, and should these conditions persist we would have longer-term concerns.
Fred Meissner is founder and publisher of
. Fred is a CMT and past President of the Market Technicians Association (MTA). He recently left Merrill Lynch's Market Analysis Department and Sector Strategy Department to form The Fred Report. A detailed bio is here: