DOW CHEMICAL HURTS CHEMICALS AND MATERIALS SPDR -- FEDEX AND DOW TRANPORTS FALL BELOW 200-DAY LINE -- DOW COMPOSITE INDEX MAY OFFER CLUES TO MARKET DIRECTION
FEDEX LEADS TRANSPORTS LOWER ... The transportation sector continues to get battered. Yesterday we showed UPS and a couple of rail stocks falling below their 200-day lines. Today's most notable casualty is FedEx. Chart 1 shows that stock breaking both its 200-day line and its June low. Even an amateur chart watcher knows that's bad chart action. A couple of other big transportation losers today were Ryder and JetBlue. That was enough to push the Dow Transports below their 200-day moving average (Chart 2). That economically-sensitive index has also broken its June low. Rising energy costs have been one of the reasons cited for this week's poor performance numbers and weak forecasts. The same is true for chemical companies which fell hard today.
Chart 1
Chart 2
DOW CHEMICAL LEADS GROUP LOWER... Chemical stocks were one of the day's weakest performers. That's not really new. The DJ US Chemical Index in Chart 3 peaked at the start of 2005 -- both on an absolute and a relative basis. After forming a double peak in May of this year, it's started falling again. Today's plunge keeps it well below its 200-day average and close to a new low for the year. [The 50-day line has dropped below the 200-day which is another negative sign]. The biggest culprit today was Dow Chemical which plunged 10% to a new three-year low. Chart 4 shows that the biggest chemical stock has been falling since the start of 2005. It turned in a disappointing second quarter report and gave a weak forecast for the rest of the year. The main reason given was rising energy and material costs. It seems like we've been hearing that a lot lately. Dupont also succumbed to selling. Chart 5 shows that it has been a big underachiever as well. Chemical selling explains why the Materials SPDR (XLB) was today's biggest percentage loser (-2.1%). It just so happens that Dow Chemical and Dupont are the two most heavily weighted stocks in the XLB. Today's selling by those two chemical giants pushed the XLB back below its 200-day average
Chart 3
Chart 4
Chart 5
WATCHING THE DOW COMPOSITE INDEX ... The Dow Utilities have been rising while the Dow Transports have been falling. While the transports have broken their 200-day average, the Dow Industrials remain above their moving average lines and sit right between the other two Dow Indexes -- neither hot nor cold. One way to decipher the overall trend in the Dow family is to study the chart of the Dow Jones Composite Index (DJA). That index is comprised of 65 stocks and includes the 30 industrials, 20 transports, and 15 utilities in the three Dow indexes. Chart 6 shows the DJA forming two declining tops in May and early July which gives it a negative slant. It's trading below a "falling" 50-day moving average (which is more serious than trading below a "rising" moving average). Most of the recent losses have come from the transports. I suggested last week that it's not a good sign for the market when the defensive utilities are rising while the cyclical transports are falling. The Dow Industrials meanwhile are being kept aloft by defensive and energy stocks. I don't take those as positive signs for the market. That's why the Dow Composite Average may offer a realistic view of things. It's worth watching very closely for any more serious signs of weakness.
Chart 6
