Warning Sign from the Transports | Stock Market Today

Monday recap:  The first couple days of April have followed a pattern we’ve seen many times in the last 12 months since equity markets began running out of steam in early 2015. Gains from the first day or two of the month were quickly reversed and if  overnight trading in equity futures holds even half their early losses, we’ll have a negative start to the month of April after day 3.

Why does this happen?

We frequently hear about “new money” that gets put to work at the beginning of every month and quarter that either gives market averages additional fuel for an ongoing rally, or at least starts the month off with a positive feel.

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Clearly any investor that checks the box “Reinvest my Dividends (that would be most of us)  or makes scheduled monthly contributions to periodic investment program contributes to “new money flow” at the beginning of each month and in many cases more significantly each quarter.

Let’s take a look at some recent examples:

  • February 1 the market barely eked out a fractional gain to start the month and was followed up by a 2% decline the following day.  To be fair, we’d had a 2½% rally the last day of January, following very market friendly comments from the late January FOMC policy statement. Have you ever noticed the FED conveniently schedules close to half its meetings just before the end of a month.  (sorry, the conspiracy theorists made me put that in there).
  • December 2015 started the month with a very nice 1% rally that teased us with the S&P 500 closing above 2100 for the 3rd highest close since the middle Q3 2015.  Those gains were reversed in 1 day, and the following day we were testing the 2050 level on the S&P 500.
  • November 2015 also started the month with an impressive 1% rally as the S&P 500 closed above 2100 for the first time since early August.  We held tight to the 2100 level for another 5 days, before losing 3½% November 9 thru 13.

Of course we don’t see this every month, but when we do it really jumps out at you and begs the question with so many funds and managers underperforming the S&P 500 or their designated benchmark, does every single dollar of “new money” each month and quarter have to be invested on day 1?

$SPY 4-5-16

$SPY 4-5-16

Where do we go from here?

After threatening a plunge into the abyss twice during Q1, Market Averages staged impressive rallies of 12% to 15% from either the January 20 or February 11 lows. Now the real work begins.  After Q1 gains of just over 1% the S&P 500 can tease us with the 2100 level, while the DJIA is less than 1½% from the rarified air of 18,000.

Close is one thing.  Getting through those levels in an environment of sub 2% GDP growth and declining earnings and revenues for the aggregate S&P 500 is a very heavy lift.   That would require a multiple expansion rally in the final year of a two term presidency.  Don’t bother trying to look up the last time that happened.

If you’re looking for a warning sign that the leadership behind the rally the last 8 weeks is taking a breather take a close look at the DJ Transport Average.   

After having been in a bear market since early 2015 the DJ Transports bottomed out January 20 when they closed at 6625 after having traded maybe 150 points lower intraday.  That close of 6625 was a 28% decline from their high in late December 2014.  2 weeks ago the DJ Transports logged back to back closing markers of 8075.   That’s a 22% rally in 8 weeks from the January 20 close.

Warning Sign from the Transports | Stock Market Today 4-5-16

A very impressive move, but still not through all the congestion of the 8000 to 8300 level from Q3 and Q4 last year.

The DJ Transports have now declined 8 of the last 10 days, and Monday closed a penny shy of 7817, less than 1 point above its 200 day moving average of 7816.36.


IYT 4-5-16

Being the first Major Market Average to peak a few days before year end 2014 and the first to bottom out 10 weeks ago on January 20 we have to view it as the best leading technical indicator of market direction until proven otherwise.

Keep the DJ Transports Front and Center and stay tuned


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