Keep an Eye on Transports ($TRAN) ~ market folly

Monday, February 9, 2009

Keep an Eye on Transports ($TRAN)

Stewie's post recently reminded me to keep an eye on the Transports. I like to watch this average for two reasons. Firstly, transports are an important gauge of economic activity. Secondly, transports typically are a leading indicator (for instance leading out of the recession). In addition to the transports, we've also looked at unemployment rates during recessions as a leading indicator, noting that the rate always skyrockets right before the worst is over.

Currently, the Transports average $TRAN is stuck in a very solid trading range, and has been for quite some time (as illustrated below). It has very strong support around the $2900 level and one should look to buy there. There seems to be a short opportunity setting up in transports as the average reaches resistance around the $3200 level. And, keep an eye out to see if the index breaks out of this past overhead resistance (as well as the 200 day moving average, which also acts as resistance). You can obviously play this by buying/selling various transport names like trucking companies, railroad plays and such.

A breakout over this heavy layer of near-term resistance would be obviously very bullish for transports. And, if this happens, it could be a signal that the recession is drawing nearer to a close, seeing as transports act as a leading indicator to economic activity. But, we unfortunately would expect the transports to fail at this resistance, setting up a nice short of the group. Because, after all, with the consumer in the house of pain, what has really changed with the economy? We would love to be proven wrong, though.

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Also, keep your eye on the Baltic Dry Index ($BDI), which measures bulk shipping. This volatile index is also a gauge for economic activity around the globe. And, if shipping activity is weak, then the odds are that we probably aren't out of the woods yet. As you can see from the chart, the index just absolutely fell off a cliff back in August of 2008. We've seen signs of a rebound, and we will continue to monitor it. Noted trader and author of the Gartman Letter, Dennis Gartman has also advocated monitoring the BDI in his recent interview with Bloomberg where he discussed the economy and Gold (GLD), among other things.

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These leading indicators of economic activity will be a great gauge for determining when we might be in the clear.

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