Dow Jones Trucking & Rail Indices
Common sense would tell us that Dow Theory is simply a logical extension of economics. That industrial stocks and transportation stocks should move in parallel, either upward or downward, in a growing or contracting economy. If industrial production is strong, the transportation required to ship goods must also be strong. Many people are taking the upward movement in transportation stocks as a sign the economy is recovering or that investors are bidding up prices in anticipation that an economic recovery is around the corner. I believe the more appropriate interpretation is the same interpretation one should take about all assets moving up this cycle. There's too much money and too much speculation in almost every global asset market. We are now seeing the outcome of that speculation as it pertains to real estate related assets and credit related assets. That virus is going to spread. It's not a matter of if but when. So, let me give you a different interpretation given where we are at this moment.
The Dow Trucking Index has hit the top of a wicked five wave rising wedge pattern similar to the S&P chart I showed last week. Taking into account the longer term since this cycle's bull market began in 2003, the picture looks a lot like a triple top. Just like the oil index I showed a few weeks ago. And, the Trucking Index is not only dealing with the problem of the rising wedge pattern but it's coincidentally hitting the lower trend line to the entire 2003-2007 bull market as shown on the chart below. For what it's worth, the Dow Transports, of which trucking and rails are a subset, fell substantially Friday before recovering. This might be pointing to price exhaustion or technically induced selling. Most importantly, while not shown on the chart, many of the characteristics of the buying pressure algorithm I showed on the oil index a few weeks ago are strikingly similar for both the truckers and the rails. And, we saw what has started to happen with oil. It fell close to $10 in a short period of time before recovering to retest what was once a support level and may now be a resistance level. In other words, I believe the markets are on extremely shaky ground. Couple that with the massive speculation I wrote a few weeks ago and we could actually see another mini crash like we saw at the start of this bear market. On the surface, the markets appear calm but the underlying currents are very disconcerting.
What usually happens in bull market tops is the big money sells into the rising top or distributes to weak hands at the top while bouncing prices. Bounce the market up, sell into a decline. Bounce, sell. Bounce, sell. That is, unless they are bubble tops where bulls are trapped in parabolic runs. Then we often see price collapse of some sort as a first move down. Why? Because any shorts and sellers have been blown out and the only traders left are on the long side of the trade. When buying exhaustion develops, markets can fall rapidly and deeply.
In many markets, including the US and Europe, we had big money get caught holding the bag and they were forced to sell into falling prices this cycle because they totally misunderstood the fundamentals. That means they were unprepared for what awaited them. Of course, this is typical of a bubble where those in it have no idea they are living in a false reality. (Big money is obviously holding a lot more bags than stocks.) So, let me speculate on what has been happening over the last few months. Big money has been given a selling reprieve by central bank liquidity in the US and Europe. Now we are seeing a buyer-less relief rally where mostly short term traders and speculators are moving prices higher. Sooner or later selling will kick in whether it is because we have hit price exhaustion, see selling triggered by technical trades, forced selling because of new problems in the credit markets or some degree of all of them.
I've had a post ready for quite a while that I believe explains other significant reasons why we haven't seen the markets decline more. Yet. It's speculation but supported by measurable data. I'll get it up sometime before the world heals itself. It's likely not a coincidence that those factors are changing exactly at this moment when I expect significant market weakness could be just around the corner.
The Dow Trucking Index has hit the top of a wicked five wave rising wedge pattern similar to the S&P chart I showed last week. Taking into account the longer term since this cycle's bull market began in 2003, the picture looks a lot like a triple top. Just like the oil index I showed a few weeks ago. And, the Trucking Index is not only dealing with the problem of the rising wedge pattern but it's coincidentally hitting the lower trend line to the entire 2003-2007 bull market as shown on the chart below. For what it's worth, the Dow Transports, of which trucking and rails are a subset, fell substantially Friday before recovering. This might be pointing to price exhaustion or technically induced selling. Most importantly, while not shown on the chart, many of the characteristics of the buying pressure algorithm I showed on the oil index a few weeks ago are strikingly similar for both the truckers and the rails. And, we saw what has started to happen with oil. It fell close to $10 in a short period of time before recovering to retest what was once a support level and may now be a resistance level. In other words, I believe the markets are on extremely shaky ground. Couple that with the massive speculation I wrote a few weeks ago and we could actually see another mini crash like we saw at the start of this bear market. On the surface, the markets appear calm but the underlying currents are very disconcerting.
What usually happens in bull market tops is the big money sells into the rising top or distributes to weak hands at the top while bouncing prices. Bounce the market up, sell into a decline. Bounce, sell. Bounce, sell. That is, unless they are bubble tops where bulls are trapped in parabolic runs. Then we often see price collapse of some sort as a first move down. Why? Because any shorts and sellers have been blown out and the only traders left are on the long side of the trade. When buying exhaustion develops, markets can fall rapidly and deeply.
In many markets, including the US and Europe, we had big money get caught holding the bag and they were forced to sell into falling prices this cycle because they totally misunderstood the fundamentals. That means they were unprepared for what awaited them. Of course, this is typical of a bubble where those in it have no idea they are living in a false reality. (Big money is obviously holding a lot more bags than stocks.) So, let me speculate on what has been happening over the last few months. Big money has been given a selling reprieve by central bank liquidity in the US and Europe. Now we are seeing a buyer-less relief rally where mostly short term traders and speculators are moving prices higher. Sooner or later selling will kick in whether it is because we have hit price exhaustion, see selling triggered by technical trades, forced selling because of new problems in the credit markets or some degree of all of them.
I've had a post ready for quite a while that I believe explains other significant reasons why we haven't seen the markets decline more. Yet. It's speculation but supported by measurable data. I'll get it up sometime before the world heals itself. It's likely not a coincidence that those factors are changing exactly at this moment when I expect significant market weakness could be just around the corner.
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