This puts the market in quite a precipitous position. It would seem that traders are pushing the industrials higher toward the 2007 highs, while the transportations are still out of favor. What this tells us is that demand for the "Raw materials" of the consumer-and-services-based economy have not been strong, but have supported a sort of muddle-through growth trajectory. Here are some highlights ... keep in mind that these are the companies that make-up the core of the consumer extravaganza that is the US economy - they make the raw stuff that every household 'must have' (I use that term 'raw stuff' loosely, but overall, they have created brands that have incredible staying power in the minds of the average American - especially the baby boomers).
In the Dow ...
3M - the makers of scotch tape and post-it notes, as well as a bunch of other brand-name products. (trading very close to it's 2007 top).
IBM - they make mainframes and servers, and provide storage and infrastructure support. These are the 'raw materials'' for networks of all types, including the internet itself. The US economy as it is cannot exist without mainframes, which require unlimited upgrading to keep pace with exponential growth in computing power. IBM is trading way above its 2007 highs.
Proctor and Gamble - Makers of Gillette, Tide, Pampers, Downey, Gain, Tide, Braun, Pringle, Head and Shoulders. PG has not even come close to beating its 2007 highs.
United Technologies - You may know them as the makers of Carrier and Kiddie. Air Conditioning is, of course, one of the things keeping the fine citizens of the US Midwest from melting in our homes and businesses, and you may even have a Kiddie fire alarm in your home protecting you and your family. UT also has substantial contracts in government infrastructure, and they make things like escalators, refrigeration units, Fuel Cells, and Aerospace and Defense Products (like high density cameras). UT is trading above their 2007 highs.
Merk&Co: Makers of Claritin, Dr Scholl's and an unbelievable number of vaccines and Animal health products. Merck is way below it's 2007 highs, which is typical of big pharma these days.
Microsoft - Love them or hate them, most businesses in North America are not using MACs, and are not using ubuntu linux and open office. They are using Microsoft products - Everything from Windows 7 Professional and Office 2010, to Microsoft Exchange Server, Sharepoint, and SQL Server. The Consumer front has gotten Microsoft a lot of popularity, but it's the business software in Windows Server, Sharepoint, SQL Server and Exchange Servers along with Office Professional products and Microsoft's business solutions which are the real backbone of the company. Without constant innovation in microsoft's business solutions, the company is dead. Unfortunately, Microsoft seems to be highly focused on gaining consumer market share. MSFT is just below its 2007 highs.
Johnson & Johnson - You know them as the Makers of Listerine, Aveeno, Neosporin, Band-Aid (did you know that it's not actually called a band-aid??!), Tylenol, Splenda, and a whole crap load of other "essential" stuff to the consumer economy I bet you didn't know they made, and even more products that only health care professionals likely even know about. JJN is meeting resistance at it's 2007 and 2004 highs of $70.
Caterpillar - The makers of the Ubiquitous CAT. You don't see many large-scale construction crews, oil and gas operations, and farms without something made by CAT. CAT is finding support at close to it's 2007 highs ($80.95).
Boeing is the Airplane manufacturer that signed a massive deal for $3.4 Billion with China Southern Airlines. Boeing is doing very well these days, and also makes an insane number of planes for Denfense and Security. Boeing is trading well below it's 2008 highs.
In this list of the top 10 holdings in the Dow, only caterpillar has been a laggard recently. Several of these holdings are trading below their 2007/2008 highs. You can clearly see from the Dow companies that one of the cornerstones of our economy lies in companies that have become 'household names'. You can't live in America without coming into contact with each of these companies' products on a regular basis. They provide the 'supply' side of virtually every major consumer economy in the world - all the crap we buy and use, all the crap we need to sustain our addictions to the internet and doing things electronically, and all the crap we need to produce to protect our desire to continue buying up all the crap we want.
Even though the transportation companies have been lagging lately, remember that many of the companies in the transportation index traded ABOVE their 2007 highs late last year and earlier this year, and have subsequently sold-off hard. The Same could not be said for their Dow Counterparts (although now it's reversed - Dow companies are trading close to their 2007 highs while the transportation stocks are being hammered down toward support levels).
The result may be a sudden "pop" in both averages sometime within the next year, but not after continued volatility that will shake out all of the weak hands.
The result may be a sudden "pop" in both averages sometime within the next year, but not after continued volatility that will shake out all of the weak hands.
In the Transportation Average ....
Union Pacific Corp has railways crisscrossing across North America, and has been a beneficiary of the Oil and Gas boom.
Fex Ex Corporation has a plethora of time-sensitive delivery services for large and small businesses, as well as for consumers. It has traded flat for three years and has made many acquisitions this year.
UPS inc - They deliver mail and small packages across the world, meeting package delivery demand for small and large businesses alike, as well as consumer mailing needs.
Norfolk Souther Corp - A Railroad company which transports a variety of things: raw materials, intermediate products, and finished goods primarily in the Southeast, East, and Midwest US. Currently, it's trading above 2007 highs.
Kansas City Southern - Another Railroad company that operates in the US, Mexico, and Panama. Kansas City Southern's North American holds primary components of the NAFTA railway system, linking the commercial and industrial centers of the United States, Canada and Mexico. It is also trading well above its 2007 highs.
JB hunt Transport Services - JB provides transportation of full truckload containerized freight, customized freight movement, transportation infrastructure services, as well as transportation and logistics services across the continental US. Once again, another transport stock trading well above 2007 highs.
Ch Robinson worldwide provides freight transportation services and logistics solutions to companies of all sizes, in a variety of industries in North America, Europe, Asia, South America, Australia, and the Middle East. It provides logistics services in addition to sourcing services and fee-based information services. It also crushed it's 2008 highs before selling off to current levels.
Landstar systems uses third party capacity providers to facilitate the logistics of rail, air and truck transportation, as well as supply chain solutions. Landstar traded within a few pennies of it's 2007 high before severely selling off to current levels.
GATX - deals in railcar leasing (North America, India and Europe), transport of dry-bulk commodities on the Great Lakes, and portfolio management (of current assets plus marine equipment, container-related assets, gas compression and power generation equipment.) GATX is trading just below its 2007 highs.
Ryder Systems - Ryder System is engaged in transportation and supply chain management solutions in the United States, Canada and the United Kingdom, and is trading well below its 2007 highs.
Norfolk Souther Corp - A Railroad company which transports a variety of things: raw materials, intermediate products, and finished goods primarily in the Southeast, East, and Midwest US. Currently, it's trading above 2007 highs.
Kansas City Southern - Another Railroad company that operates in the US, Mexico, and Panama. Kansas City Southern's North American holds primary components of the NAFTA railway system, linking the commercial and industrial centers of the United States, Canada and Mexico. It is also trading well above its 2007 highs.
JB hunt Transport Services - JB provides transportation of full truckload containerized freight, customized freight movement, transportation infrastructure services, as well as transportation and logistics services across the continental US. Once again, another transport stock trading well above 2007 highs.
Ch Robinson worldwide provides freight transportation services and logistics solutions to companies of all sizes, in a variety of industries in North America, Europe, Asia, South America, Australia, and the Middle East. It provides logistics services in addition to sourcing services and fee-based information services. It also crushed it's 2008 highs before selling off to current levels.
Landstar systems uses third party capacity providers to facilitate the logistics of rail, air and truck transportation, as well as supply chain solutions. Landstar traded within a few pennies of it's 2007 high before severely selling off to current levels.
GATX - deals in railcar leasing (North America, India and Europe), transport of dry-bulk commodities on the Great Lakes, and portfolio management (of current assets plus marine equipment, container-related assets, gas compression and power generation equipment.) GATX is trading just below its 2007 highs.
Ryder Systems - Ryder System is engaged in transportation and supply chain management solutions in the United States, Canada and the United Kingdom, and is trading well below its 2007 highs.
The Link Between DJIA and DJT
What's the link between the two indexes? The above transportation companies (as well as others not covered here) make up the largest, most reliable, most technologically advanced transportation companies in the US. These are the companies which are used by large, efficiency dependent companies to deliver their physical goods to market, whatever those goods may be.
Coming around full circle, it's the weekly charts that we should be most interested in as an indicator for 'going long' or 'going short'. As an investor (as opposed to a trader), I am not interested in trading the top of this intermediate cycle, but in analyzing the nature of the holdings of each index we can conclude that in the medium term, it is likely that we will continue to see volatility in the markets - and we should be watching for divergence in the lows and highs of each index to see where we are headed next.
Our thesis for a move down in the Dow rests on the market theory of this relationship between the Dow and Trans, which is currently indicating two things: Very Long term, the prospects for the broader economy don't look good - the transportation index peaked in 2011 above the critical 2007 levels, while the Dow index failed to confirm. The result was a sharp downdraft in both indexes. In recovery, the Dow index has been making new intermediate highs toward the goal of breaching it's all time highs. The transportation average followed along until February 2012, but has been trending down since then (confirming would have meant a new primary bull market was in effect). This action is indicative of the trouble the real economy is in, but until the Dow confirms the downward move in the transportation index, I will remain bullish on the economy for the short term (meaning, the next quarter).
Peace,
Ryan
Our thesis for a move down in the Dow rests on the market theory of this relationship between the Dow and Trans, which is currently indicating two things: Very Long term, the prospects for the broader economy don't look good - the transportation index peaked in 2011 above the critical 2007 levels, while the Dow index failed to confirm. The result was a sharp downdraft in both indexes. In recovery, the Dow index has been making new intermediate highs toward the goal of breaching it's all time highs. The transportation average followed along until February 2012, but has been trending down since then (confirming would have meant a new primary bull market was in effect). This action is indicative of the trouble the real economy is in, but until the Dow confirms the downward move in the transportation index, I will remain bullish on the economy for the short term (meaning, the next quarter).
Peace,
Ryan
