ARE TRANSPORTS FLASHING A FALSE BUY SIGNAL?

Interesting read in yesterdays Journal on the Transports.  Readers know that I am fond of following the REAL economy – consumer trends and blue collar jobs such as trucking score high on my scale of economic importance.  Lately, we’ve been seeing an odd trend.  The transport stocks and the general market tend to be trending higher despite little to no signs of strength in actual consumer spending or real economy industries like trucking and rails.   The Journal writes:

A new high for transports would “confirm,” in technical lingo, a similar peak for the Dow industrials this week. According to the school of market analysis called Dow Theory, which arises from the ruminations of Wall Street Journal co-founder Charles Dow, having the Dow industrials and the Dow transports in such harmony is strong evidence a bull market is cooking.

But this indicator can send false signals. It was bullish in the spring of 2008, just before the transports and industrials tumbled together.

And reading these charts is a subjective art. Ryan Detrick, technical strategist at Schaeffer’s Investment Research, notes that one could take the view that transports have lagged behind the industrials all year, often a warning sign for stocks. And transports have a good reason for lagging behind: Transportation hasn’t caught up to other recent signs of economic recovery.

One measure of this is the number of railroad cars being loaded with coal, auto parts and other stuff at the nation’s major railroads. Car loadings this year are down nearly 20% from the same period in 2008, putting this on pace to be the worst year since 1982, according to the Association of American Railroads.

The AAR on Thursday reported that loadings jumped last week to their highest levels in nine weeks. But loadings have zigzagged up and down within a downward trend since March, even as transport stocks have risen. Ordinarily, transport stocks and car loadings are more closely correlated, said Ed Yardeni, chief investment strategist at Yardeni Research.

“The plunge in rail-car loadings,” Mr. Yardeni recently told clients, “is one of the most glaring nonconfirmation signals for those of us rooting for an economic recovery and a sustainable bull market.”

The King of Dow Theory sounds equally pessimistic, despite near confirmation in the Dow Theory buy signal.  Yesterday, Richard Russell wrote:

The non-confirming Transports have finally caught the attention of today’s Wall Street Journal. The Journal talks about freight-car loadings. The association of American Railroads reports that “loadings have zigzagged up and down within a downward trend since March. The plunge in rail-car loadings is one of the most glaring non-confirmation signals for those of us rooting for an economic recovery and a sustainable bull market.” Russell comment — The falling freight-car loadings may tell us something about the refusal of the Transports to confirm.

Into the weekend, and the mystery lingers on. My PTI was up 2 to 5899 while its MA was 5875. But the big news from a Dow Theory standpoint was that the Transports closed down 38, leaving them 43 points below their May 6 breakout level of 3404.11. Many subscribers haven’t taken the Transport non-confirmation seriously. But it’s now over a month since the Transports have refused to confirm. Frankly, I’m surprised that the Fed hasn’t manipulated the Transport Average and forced it to confirm, after all there are only 20 Transport stocks in that Average, and manipulation would be easy, but then again — maybe the Fed doesn’t follow Dow Theory.

Despite what the technicals might say it’s difficult to argue with the actual numbers. Retail sales are still very weak and there is absolutely positively no recovery in the rail data.