DOW TRANSPORTS ARE UP AGAINST OLD HIGHS -- TRUCKERS ALSO RUN INTO RESISTANCE IN BROADENING TOP FORMATION -- FINANCIALS LEAD MARKET SHARPLY LOWER IN WHAT COLD BE THE END OF TWO-MONTH RALLY -- HIGH APRIL PPI IS EVEN WORSE THAN REPORTED
DOW TRANSPORTS TEST OLD HIGH... While the Dow Industrials are backing off from their 200-day moving average after recovering about half of their October/March decline (Chart 1), the Dow Transports are testing an important resistance barrier of their own. Chart 2 shows the Dow Transports testing their July 2007 highs. That may account for some profit-taking in that leading group over the last couple of days. A month ago (April 18), I examined what was driving the transportation rally and it was primarily the rails. I suggested that was due primarily to the fact that the rails were riding the commodity boom since they were the main carriers of commodity products. According to today's IBD, recent bullish reports cite higher shipments of coal and farm products (corn, soybeans, and wheat) accounting for the rail strength (as opposed to shipments of consumer products which have softened). That would seem to support my contention that rail strength is more a reflection of commodity demand than U.S. economic strength. Of the three transportation groups (airlines, rails, and truckers), rails are least effected by rising energy costs (while airlines are the most effected). That's because rail operators pass on most of their higher fuel costs to their customers.
Chart 1
Chart 2
TRUCKERS FORM BROADENING TOP FORMATION... Chart 3 shows the relative performance of the three transportation groups since the start of 2007. The rails are the strongest, while the airlines are the weakest. The one I'm most concerned about today is the truckers. That's because that index is testing an important resistance line. The weekly bars in Chart 4 show a relatively rare price formation which is called the "broadening top". That formation resembles an "expanding triangle" where the two trendlines drawn over and under the expanding tops and bottoms diverge from one another. Here's how my 1986 edition of Technical Analysis of the Futures Markets descibes that rare price pattern: "A broadening top... shows three successively higher peaks and two declining troughs. This type of expanding triangle usually occurs at market tops." Since this is the third peak since 2006, and prices are up against the resistance line, truckers are at a critical spot. Adding to today's profit-taking in the Dow Transports is a -3.5% plunge in airlines. Those are another two reasons why the transportation rally may stall here.
Chart 3
Chart 4
MARKET RALLY MAY BE ENDING... The intermarket scenario that I suggested yesterday appears to have taken hold today. Stocks are falling sharply while bond prices are rising. A weaker dollar is pushing gold and other commodities higher. Crude is hitting a new record. Among the day's weakest sectors are financials, retailers, homebuilders, REITS, and semiconductors. Chart 5 shows the Financials SPDR trading below its 50-day average after having completed a bearish "rising wedge" formation. That's not a good sign for it or the rest of the market. Unless the market stages an afternoon rally, there's a strong chance that the two-month rally that started in mid-March is starting to roll over.
Chart 5
PPI NUMBER IS EVEN WORSE THAN REPORTED ... One of the factors pushing stocks lower is a big jump in the April PPI numbers. April core PPI came in at 0.4% which was twice as much as expected. The headline number came in a smaller 0.2%. Don't be fooled by that lower number which reflects a "drop" in energy costs and flat food prices. The fictitious drop in April energy costs was based on seasonal adjusting. That's the same trick they tried with last week's CPI numbers. In the real world, energy prices were sharply higher during April as Chart 6 shows. That means that the inflation numbers are even worse than reported.
Chart 6
