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Mind The Dow Divergence - Transports Are Signaling A Slump

Tyler Durden's picture




 

Submitted by Pater Tenebrarum via Acting-Man.com,

A Possible Economic Red Alert

We have already remarked on the growing divergence between the Dow Jones Transportation Average (TRAN) and the Dow Jones Industrials Average (DJIA) on previous occasions. These two stock averages marked the beginning of technical analysis as we know it today. Charles Dow compared the action in the averages over the long term and noticed that price divergences between them tended to develop close to turning points in the economy and the stock market.

 

engine-knock

 

 

Dow assumed that a marked upturn or downturn in one of the two sectors would soon be followed by a turn in the other sector. He essentially concluded that unless the two sectors were “confirming” each other, trouble was likely brewing under the surface. Over time, a set of technical trading rules was developed based on this observation, which is known as the “Dow Theory” today. To be sure, the Dow Theory is by no means providing fool-proof signals. However, a very large and long-lasting divergence between the two averages is usually not a particularly good sign.

 

TRAN vs INDU

Transportation stocks have steadily weakened since peaking at the last trading day of 2014. The DJIA by contrast has by and large moved sideways since then – click to enlarge.

 

No firm Dow Theory “sell signal” is in place yet, although one could perhaps regard the DJIA’s dip in late June/ early July as a “minor” DT sell signal. Still, the divergence remains a noteworthy development, especially as it coincides with worsening breadth in the broader market (even in the technology sub-sector, as John Hussman points out in his most recent weekly market report).

However, what prompts us to write about this topic again is an article by Tony Sagami that was recently published at John Mauldin’s site under the colorful title Sinking Ships, Train Wrecks, and Empty Trucks: My Case Against Transportation Stocks”.

 

Falling Prices and Tonnages

Mr. Sagami is mainly concerned with explaining why he thinks one should avoid transportation stocks like the plague here (or rather, why he even thinks about shorting a number of them). We find the charts he shows primarily intriguing from a wider economic perspective though.

The first chart depicts Shanghai freight rates for container ships. Container shipping companies are evidently hurting rather badly here, as freight rates have even fallen quite a bit below bunker fuel costs recently.

 

Shanghai container freight

Shanghai containerized freight index – the cost of shipping a container from Shanghai to Rotterdam. This is quite a stunning collapse – on this particular route, ships will reportedly lose $57 per TEU on fuel costs alone.

 

As Mr. Sagami explains, a lot of this has to do with the still growing overhang of new ships, as shipping companies have ordered too many new ships at the height of the last boom. The supply glut is already enormous, but seems set to worsen even further in the near future. Trade data from the region suggest that Asian trade remains quite weak as well. In short, the glut in container ships only explains a part of the decline.

Even more interesting is the ATA truck freight tonnage index in the US though. This index doesn’t measure prices, but the actual tonnage of freight hauled on US highways by truckers. The ATA truck tonnage index has turned down rather noticeably in recent months – in fact, its recent peak has coincided perfectly with the peak in the transportation average shown above:

 

ATA trucking index

A sharp fall in truck tonnage since the beginning of the year.

 

This could still turn out to be another short term blip, both in the TRAN and the ATA index. Somehow we don’t think so though. The decline already seems too pronounced for a mere short term blip – and it has lasted longer than a quarter by now.

 

Conclusion

The US economy is widely seen as the world’s best performing major economy at the moment. However, so far this year most economic data have actually been somewhere between very soft and lackluster. There is one seeming area of strength, namely the labor market. Not only is this a lagging indicator, but the decline in the unemployment rate masks the fact that a great many jobless people are simply no longer counted as unemployed. They have instead become part of the plunging labor force participation rate statistic.

The steep fall in truck tonnage is definitely an alarm signal. It indicates that inventories are already too high relative to demand, something that seems to be confirmed by recent industrial production and retail sales data. Given that tonnage has continued to decline since the end of Q1, one can no longer blame the port strikes either. To be sure, the US economy is not yet signaling an imminent recession. At best though it is muddling through at a very subdued pace. It probably won’t take much to push it over the edge.

 

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Wed, 07/22/2015 - 08:47 | 6340876 LawsofPhysics
LawsofPhysics's picture

When the majority of your eCONomy is simply pushing bullshit paper/digital bits around, does the transport of real goods matter?

Wed, 07/22/2015 - 08:51 | 6340894 J Jason Djfmam
J Jason Djfmam's picture

Mostly to China.

Wed, 07/22/2015 - 09:21 | 6340972 Bush Baby
Bush Baby's picture

Speaking of China, their "Market" has stabilized despite the "off-the-charts" manipulation, and you believe that our "Market" will somehow go down because of some bearish indicators?

The Chinese are just learning to walk, we are seasoned marathan runners.

 

Wed, 07/22/2015 - 09:00 | 6340920 TeethVillage88s
TeethVillage88s's picture

Well we have had great advances in nano technology through the pioneering work of NASA, DoD, and private industry.

So people are just now learning that meals are shipped cheaper due to the light weight of Ramen, Rice, & Beans. S/

Wed, 07/22/2015 - 08:47 | 6340877 Headbanger
Headbanger's picture

Railroad Index?

 

Wed, 07/22/2015 - 08:47 | 6340880 stant
stant's picture

I hope I can get one of those ups or FedEx trucks cheap to make one of those food vendors out of

Wed, 07/22/2015 - 08:48 | 6340886 J Jason Djfmam
J Jason Djfmam's picture

2015-The year of the tranny.

Wed, 07/22/2015 - 08:52 | 6340896 corporatewhore
corporatewhore's picture

who pays attention to that silly old dow jones theory?

Wed, 07/22/2015 - 08:57 | 6340902 847328_3527
847328_3527's picture

I wonder how many freighters are sitting offshore waiting to flood the USA with more apparel, iCrap, and on and on?

You can barely walk thru some of these store aisles already. What are they going to do with all that tonnage of inventory?

Wed, 07/22/2015 - 08:58 | 6340913 J Jason Djfmam
J Jason Djfmam's picture

Build more islands.

Wed, 07/22/2015 - 08:58 | 6340915 rsnoble
rsnoble's picture

I love all the 'not in a recession' 'Greece is ok' talk lately.  Might actually set up for some real selling if it continues.

Wed, 07/22/2015 - 09:09 | 6340942 beavertails
beavertails's picture

With commodities being taken out back and shot, transports is just another cut on the corpse.  QE4 is just waiting for the fiscal stimulus package from the Congress churn in '16.  Take that to the bank Mr. Trump.

Wed, 07/22/2015 - 09:52 | 6341058 Ralph Spoilsport
Ralph Spoilsport's picture

I live on the ICW (Intracoastal Waterway) between Philly and Baltimore. Almost all the ship traffic these days is made up of RORO car carriers transporting high end import cars and SUVs, and barges containing petroleum products. We didn't see very many container ships go through over the past year and hardly any the past few months. No hard numbers, just my impression for what it's worth.

Wed, 07/22/2015 - 09:49 | 6341075 vq1
vq1's picture

I have a solution:

 

1) Have the fed print tonnes of paper money and ship it, the longest route possible, to recipients. 

Thus improving the demand and tonnage. 

 

Wed, 07/22/2015 - 10:48 | 6341336 There is nothin...
There is nothing more frightening than ignorance in action's picture

I'd agree with the assessment here.  One other 'demand' factor, diesel fuel is now lower than gasoline in most of the country; although this can also be due somewhat to a change in the refinable mix of crude, it is hard to imagine that diesel, which a year ago was nearly $1.00 higher than gasoline, can now be slightly ($.05-0.10) lower than gasoline, with truck transportation being in full use.

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