I wrote an article yesterday about the growing divergence between the junk bond and equity markets. There is a second divergence within the equity market that is equally ominous.
Transportation Index
In Mark Hulbert's recent column, he reported that "Even as the Dow Industrials were holding their own over the past couple weeks, the Dow Transports were breaking down in a big way." Why was that important? Because the transportation sector is also a leading indicator of the economy and of the equity market, just like the junk bond market.
"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. Insofar as the index continues to be a reliable leading indicator, therefore, the economy and stock market may be living on borrowed time."
Every consumer item in the U.S. and every intermediate good must eventually be shipped to the final consumer or to the intermediary. Even service providers must purchase ancillary supplies, which must also be delivered. As a result, the transportation sector is highly sensitive to cyclical changes in economic growth.
Shipping Index
William Watts recently reported on a shipping index that is commonly used as another leading indicator of global economic growth.
"The Baltic Dry Index, a shipping and trade gauge created by London’s Baltic Exchange, tracks the cost of moving raw materials such as iron ore and coal by ship. On Thursday, the index fell to an all-time low of 504—the lowest since it began in 1984, according to The Wall Street Journal.
The index is seen as a guide to the health of the world economy, given its role in tracking demand for basic commodities. So it’s no surprise the new low was getting people worked up."
Conclusion
Shipping and transportation are both leading indicators of economic growth and there are indications that both sectors are in peril. While equity market volatility has definitely increased, U.S. equity prices are still near all-time highs. These divergences are disturbing, especially considering the equally dramatic divergence between the junk bond and equity markets.
Print and Kindle Versions of Brian Johnson's 2nd Book are Available on Amazon (75% 5-Star Reviews)
Exploiting Earnings Volatility: An Innovative New Approach to Evaluating, Optimizing, and Trading Option Strategies to Profit from Earnings Announcements.
Print and Kindle Versions of Brian Johnson's 1st Book are Available on Amazon (79% 5-Star Reviews)
Option Strategy Risk / Return Ratios: A Revolutionary New Approach to Optimizing, Adjusting, and Trading Any Option Income Strategy
Trader Edge Strategy E-Subscription Now Available: 20% ROR
The Trader Edge Asset Allocation Rotational (AAR) Strategy is a conservative, long-only, asset allocation strategy that rotates monthly among five large asset classes. The AAR strategy has generated annual returns of approximately 20% over the combined back and forward test period. Please use the above link to learn more about the AAR strategy.
Brian Johnson
Copyright 2015 - Trading Insights, LLC - All Rights Reserved.
About Brian Johnson
I have been an investment professional for over 30 years. I worked as a fixed income portfolio manager, personally managing over $13 billion in assets for institutional clients. I was also the President of a financial consulting and software development firm, developing artificial intelligence based forecasting and risk management systems for institutional investment managers.
I am now a full-time proprietary trader in options, futures, stocks, and ETFs using both algorithmic and discretionary trading strategies.
In addition to my professional investment experience, I designed and taught courses in financial derivatives for both MBA and undergraduate business programs on a part-time basis for a number of years. I have also written four books on options and derivative strategies.
Transportation Sector – Ominous
I wrote an article yesterday about the growing divergence between the junk bond and equity markets. There is a second divergence within the equity market that is equally ominous.
Transportation Index
In Mark Hulbert's recent column, he reported that "Even as the Dow Industrials were holding their own over the past couple weeks, the Dow Transports were breaking down in a big way." Why was that important? Because the transportation sector is also a leading indicator of the economy and of the equity market, just like the junk bond market.
Every consumer item in the U.S. and every intermediate good must eventually be shipped to the final consumer or to the intermediary. Even service providers must purchase ancillary supplies, which must also be delivered. As a result, the transportation sector is highly sensitive to cyclical changes in economic growth.
Shipping Index
William Watts recently reported on a shipping index that is commonly used as another leading indicator of global economic growth.
Conclusion
Shipping and transportation are both leading indicators of economic growth and there are indications that both sectors are in peril. While equity market volatility has definitely increased, U.S. equity prices are still near all-time highs. These divergences are disturbing, especially considering the equally dramatic divergence between the junk bond and equity markets.
Print and Kindle Versions of Brian Johnson's 2nd Book are Available on Amazon (75% 5-Star Reviews)
Exploiting Earnings Volatility: An Innovative New Approach to Evaluating, Optimizing, and Trading Option Strategies to Profit from Earnings Announcements.
Print and Kindle Versions of Brian Johnson's 1st Book are Available on Amazon (79% 5-Star Reviews)
Option Strategy Risk / Return Ratios: A Revolutionary New Approach to Optimizing, Adjusting, and Trading Any Option Income Strategy
Trader Edge Strategy E-Subscription Now Available: 20% ROR
The Trader Edge Asset Allocation Rotational (AAR) Strategy is a conservative, long-only, asset allocation strategy that rotates monthly among five large asset classes. The AAR strategy has generated annual returns of approximately 20% over the combined back and forward test period. Please use the above link to learn more about the AAR strategy.
Brian Johnson
Copyright 2015 - Trading Insights, LLC - All Rights Reserved.
About Brian Johnson
I have been an investment professional for over 30 years. I worked as a fixed income portfolio manager, personally managing over $13 billion in assets for institutional clients. I was also the President of a financial consulting and software development firm, developing artificial intelligence based forecasting and risk management systems for institutional investment managers. I am now a full-time proprietary trader in options, futures, stocks, and ETFs using both algorithmic and discretionary trading strategies. In addition to my professional investment experience, I designed and taught courses in financial derivatives for both MBA and undergraduate business programs on a part-time basis for a number of years. I have also written four books on options and derivative strategies.