If History Is A Barometer, The Transports Are Headed For A Likely Disaster And Soon To Follow Are The Utilities
As I had noted on here a month ago, the Transports had fulfilled their Elliott wave pattern and were likely topping. Or, as I had noted in my personal journal on April 1, the Transports were driving off of a cliff. "There is absolutely zero doubt and I am so confident that this is the fifth blow off wave for Transports this cycle. Now, what would really scare me is if the Transports rose through this resistance to rise another ten percent to a resistance line going back to 1929! Ominous? A correction in the Transports of earthquake magnitude?"
What does the future hold for the Transports? Well, nobody knows exactly. But, let's look at a few facts:
@The economy is slowing
@The building materials space is cratering
@Consumer spending of discretionary items, many of which are manufactured in Asia, slowing
@Auto sales for the big three are cratering
@Corresponding raw materials needed for durables production are slowing
@The raw energy materials needed to build all of this slowing
So, why have the Transports boomed this cycle? All of the reasons above. The Transports have been this overbought two times since the Great Depression of 1929. In those two occurrences Transports fell approximately 90% and 60%. Are we close to a bottom with Transports down 20%? You be the judge. I am of the opinion that over the long term prices revert to their mean. That means just not Transports but consumer spending, energy prices, building prices and on and on and on.
It's obvious and easy for anyone to pick up the newspaper and look at the price of a stock and see it has fallen. Wow, the Transports are down 20% or 10% or whatever. But what is more prudent as an quantitative investor is to be able to actually predict tops with some degree of accuracy using the tools at their disposal. As the greatest speculator of the twentieth century, Jesse Livermore, said, "I knew it was foolish to ever catch the tops or the bottoms of the moves. It is always better to sell large holdings into an advancing market when there is plenty of volume. The same is true on the short side; you are best to cover the short position after a steep fast decline."
So, under the same premise of selling large holdings into advancing markets, the S&P Utility Index is advancing. The index is near its all time high as we speak. That is bullish, right? Long term bond rates are low. Utilities are defensive, right? They pay a decent 3-5% dividend yield on average. The Fed will soon be easing, right? Well, I guess that all depends. If I told you utilities have reached this level of overbought only three times since the Great Depression and in those times they have fallen approximately 90%, 60% and 60% would that be defensive? Is it worth the risk? What did Jesse Livermore say?
What does the future hold for the Transports? Well, nobody knows exactly. But, let's look at a few facts:
@The economy is slowing
@The building materials space is cratering
@Consumer spending of discretionary items, many of which are manufactured in Asia, slowing
@Auto sales for the big three are cratering
@Corresponding raw materials needed for durables production are slowing
@The raw energy materials needed to build all of this slowing
So, why have the Transports boomed this cycle? All of the reasons above. The Transports have been this overbought two times since the Great Depression of 1929. In those two occurrences Transports fell approximately 90% and 60%. Are we close to a bottom with Transports down 20%? You be the judge. I am of the opinion that over the long term prices revert to their mean. That means just not Transports but consumer spending, energy prices, building prices and on and on and on.
It's obvious and easy for anyone to pick up the newspaper and look at the price of a stock and see it has fallen. Wow, the Transports are down 20% or 10% or whatever. But what is more prudent as an quantitative investor is to be able to actually predict tops with some degree of accuracy using the tools at their disposal. As the greatest speculator of the twentieth century, Jesse Livermore, said, "I knew it was foolish to ever catch the tops or the bottoms of the moves. It is always better to sell large holdings into an advancing market when there is plenty of volume. The same is true on the short side; you are best to cover the short position after a steep fast decline."
So, under the same premise of selling large holdings into advancing markets, the S&P Utility Index is advancing. The index is near its all time high as we speak. That is bullish, right? Long term bond rates are low. Utilities are defensive, right? They pay a decent 3-5% dividend yield on average. The Fed will soon be easing, right? Well, I guess that all depends. If I told you utilities have reached this level of overbought only three times since the Great Depression and in those times they have fallen approximately 90%, 60% and 60% would that be defensive? Is it worth the risk? What did Jesse Livermore say?
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