Thursday, July 1, 2010

A Ray Of Sunshine

A ray of sunshine on an otherwise dreadful market outlook is the condition of the transports and a key tech leader index. These rays really stand out in all the gloom. The debt dominos appear to be catching up with the rally from 2009. But before we bury the recovery, lets look at something important that is refusing to go along with the gloom so far.

If you put any faith in Dow Theory (and you should) you want to pay attention to what the transports are doing because for a move to be confirmed in the broad market, it must be replicated in the transports. Quite typically, a change in trend without transport confirmation turns out to be bogus. This has been a reliable indicator since the days when the rails were the main transport. In our day, rails have become much less significant, but recently have taken on the role of a reflection of the commodities market. Coal, and about anything you pulverise and haul, move much cheaper in quantity by rail than by smaller truck units getting 5 mpg in traffic. That's a major reason Warren Buffett is buying up railroads. If you look at how the rails are doing in this bad market (check CSX, CNI, KSU) you see they are still in bull climb mode despite the whacking commodites are taking. To isolate the transports as a reflection of purely economic activity apart from the global commodities market, I like to look at the Nasdaq transports because they are virtually devoid of rails:

Here you see pretty much the same thing as the rails show - they both are not confirming the change in trend seen in the S&P 500. The transports are proceeding on an upsloping 200 dma and may have put in a reversal stick on that trend line today. The retail RLX index has been leading the correction down and also has the look of a reversal day being put in at the bottom of a trading channel.

The leader groups, however, are mixed in their lead/lag condition. A nice one that is still leading is the semiconductor group:

The SOX also looks a little stubborn in going along with the Dow. These are the groups to watch. If they confirm the change in trend of the broad indexes, the market is on to its next phase.

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