Friday, August 31, 2012

Stalking The Bear: Trouble In Transports

Part 2 of a series.

Before we begin with a detailed look at the Transportation group, I'd like to remind the reader this series is titled, "Stalking the Bear," not skinning it. There will be time enough for skinning but patience is of utmost importance at this juncture. Now is the time to apply war paint, rub your hands in the dirt, put on the foil or whatever else you want to do in preparation for the fight. You want to be prepared so you can take advantage -- not be taken by surprise.

In Part 1 of the series, "Trouble Brewing Behind Facade of Bull Rally," I highlight the "key reversal" of Apple Inc. (AAPL) the supreme leader of this bull market. Does this mean AAPL can't attempt to make a new high? Absolutely not. Sometimes a series of reversals must occur to derail an uptrend such as AAPL's. Sometimes not. Either way, only a fool would ignore the clear sign of weakness that punctured AAPL's pristine ascent last week.

Never forget, the object of "Stalking the Bear" is to make you aware of the warning signs so you are not swept up and eventually away by the senseless cheerleading going on around you. One of the best tools for such stalking is the close monitoring of the Transports.

Conventional wisdom suggests the transportation group leads the overall market, because of said group's hypersensitivity to economic conditions. However, a debate about the reasons for leadership, while interesting, would in fact be missing the point. This "transports lead" school of thought has a large and successful following and hence must be respected.

Below is a price chart of the Transports (IYT) next to the S&P 500 (SPY). I've chosen a 60 minute interval for prices to magnify the significant divergence unfolding. The 4 day yellow rectangle highlights the demarcation point. IYT broke down on Feb. 7 and has only accelerated lower as the SPY has obliviously marched on.

I feel obligated to again stress that this divergence, while worrisome, is not reason alone to sell the market. The charts above instead illustrate the deterioration of a key pillar of support for the general market. This price behavior will eventually come home to roost, and is another piece to the "stalking" puzzle. Place this piece next to the AAPL issues and Copper's under performance, and a picture begins to form. A picture that is not as bullish as the major averages suggest, or as exciting as CNBC, et al, would have you believe. DOW 13,000 is a meaningless event. Stay focused.

Perhaps these warning signs are foreshadowing an impending shock to the economy that will, of course, negatively affect equities. I will leave you with the following charts of oil and gold. The strength of both commodities may suggest some key geopolitical issue (or issues) is close to the boiling point. While I believe the Greece controversy is not going to be the catalyst (Greece is a 2011 shock topic), conceivably, the current sideshow in Iran may become center stage a lot quicker than the average market participant is expecting.

In the 1st figure below, I am using the Oil ETFs as a proxy. On the left you will see the daily price chart of OIL (representing WTI) and on the right BNO (representing Brent). Clearly both are experiencing strong breakouts of sound bases. Significantly higher energy prices are a killer of economic growth.

In the 2nd figure I've chosen to use the ETF Sprott Physical Gold (PHYS) for our Gold proxy. This investment actually guarantees real physical gold is behind the paper certificate. Other ETFs fail to provide adequate assurance and are in some cases unapologetic ponzis, but I digress. As you will see, the daily price of PHYS has broken the downtrend in place since mid August. The two yellow rectangles highlight the rather obvious and well formed double bottom. Flight to safety? Or simply flight out of paper currencies as Central Banks print and the Currency Wars heat up?

Disclosure: I am long PHYS.

No comments:

Post a Comment