A bleak market outlook foretold by Dow Jones Transportation Average

First order of business for this new week: a quick review of last week’s market movement (Dec 14-18).

Last week, the Dow Jones Industrial AverageDJIA, -2.10%  falling 0.8%, the S&P 500 Index SPX, -1.78%  down 0.4%, the Nasdaq Composite Index COMP, -1.59%  shedding 0.2% for the week, after oil prices settled to their lowest levels in nearly seven years.

On Dec 18, we also saw the damage done by triple witch — when contracts for stock index futures, stock index options and stock options all expire at the same time — and market subsequently sold off.  I expect volatility to settle down this week as traders get a nice distraction of holidays from all trading and no fun.

Now, Dec 21,  we are looking at a holiday shortened week with only three and half trading days to go before Christmas (not a white one as  I has been praying for), trading this morning is muted with market opened higher but slowly fading away to hug flat line. it is all quiet and fine, right? No, under calm facade, mutual funds and hedge funds portfolio managers are selling their winners and losers to meet redemption requests from retail investors. While it’s never a good idea to fight the Central Banks when they have a mind to boost the markets – it’s also never a good idea to ignore ALL the warning signs that are telling us the Emperor may have a lot less clothes than it seems.

Today, we take a look at the Dow Jones Transportation Average DJT, the oldest stock market index for clues as to where markets are heading to.

Tthe Dow Jones Transportation Average DJT was created in 1884, even before the Dow Jones Industrial Average DJIA. Last week it went down by 2.25% . Even as the Dow Industrials were holding their own over the past couple weeks, the Dow Transports were breaking down in a big way. According to Marketwatch.com, “In intra-day trading Monday (Dec 14), the Transports fell below the index’s August low. And even after Tuesday’s big bounce for the broader market, the Dow Transports are only 1.1% higher than their August closing low.”

The Transports’ weakness has bearish implications for at least two reasons. The first is that the transportation sector is a leading indicator of economic downturns. This was documented several years ago by a study conducted by the Bureau of Transportation Statistics in the U.S. Department of Transportation, titled “The Freight Transportation Services Index as a Leading Economic Indicator.” The study’s authors concluded that the index over the past three decades “led slowdowns in the economy by an average of four to five months.”

Unfortunately, the Freight Transportation Services Index hit its all-time high in November 2014, more than a year ago. If the index continues to be a reliable leading indicator,  the economy and stock market may be living on borrowed time. Just this week, Raymond James downgraded FedEx FDX, -3.09% one of this sector’s bellwethers, citing weaker-than-expected volumes.

The other reason the Transports’ weakness is ominous: It is one of the two stock market averages that are the focus of the Dow Theory, the oldest stock market timing system in widespread use today.


Chicago Fed National Activity Index (CFNAI)

The Chicago Fed National Activity Index (CFNAI) is a monthly index designed to gauge overall economic activity and related inflationary pressure. The CFNAI is released at 8:30 a.m. ET on scheduled days, normally toward the end of each calendar month.

Just this morning (Dec 21) the November Chicago Fed report hit -0.30 and the prior report was revised even lower to -0.17 and that is likely to lead to yet another downgrade of our GDP expectations for Q4 – which is getting close to recessionary.

Raising more cash and be cautious! Happy trading!

Albert Yang (多雲)

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