TRANSPORTATION ISHARES TEST SPRING HIGH -- - RAILS HAVE BEEN THE MAIN DRIVER OWING TO STRONG COMMODITY DEMAND -- UNION PACIFIC HITS NEW RECORD -- MOVE INTO TIPS SHOWS MORE INFLATION CONCERN -- NEW SUPPORT LEVEL FOR GLD AND GDX
TRANSPORTATION ISHARES REACH MAY HIGH... Previous messages showed the upside breakout in the Dow Transports (over their summer high) which confirmed a previous upside breakout in the Dow Industrials and constituted a Dow Theory buy signal (see circle). Both Dow averages are approaching another test at their spring highs. Needless to say, the ability of both Dow averages to clear their spring highs is necessary to keep the new uptrend going. I'm going to focus today on what I consider to be the most economically-sensitive part of the transports which are the rails. Chart 1 shows the DJTA iShares (IYT) testing its May high near 86. Rails have the strongest IYT weighting at 29%, air freight is second at 23%, truckers are third at 21%, and airlines at 8%. Rail dominance is further demonstrated by the fact that four out of the top ten IYT holdings are rails. Transportation stocks are considered to be economically-sensitive because they move goods throughout the country. The two groups most often used to move that traffic are rails and truckers. Chart 2 shows, however, that rails (black line) have been much stronger than truckers (blue line). One reason for stronger rails is that they're less fuel-sensitive than truckers. Another is that rails are the primary mover of commodities like coal and grains which have been very much in demand. In a sense, it could be said that rails are another way to play rising commodity markets.
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Chart 1
Chart 2
RAIL INDEX TESTS ALL-TIME HIGH... Another sign of rail strength is seen in Chart 3. That chart shows the Railroad Index (bars) in the process of testing its 2008 high. By contrast, the Dow Transports (gray line) are still below their 2010 peak (as are the truckers). The rail index is the only one even close to a record high. One rail stock has already hit a new record. Chart 4 shows Union Pacific having cleared its 2008 high. [UNP is the second biggest holding in the IYT at 10%]. The next in line is Norfolk Southern (IYT weight of 7%), which has just hit a new 52-week high (Chart 5). CSX and Kansas City Southern are testing their 2010 highs as shown in Charts 6 and 7. All four rails have been rising faster than the Dow Transports this year (see RS lines below charts). The moral of the story is that if you wish to travel along with the transports, your best bet is to ride the rails. A bet on the rails is a bet on the economy. It's also a bet on rising commodity prices.
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Chart 3
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Chart 4
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Chart 5
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Chart 6
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Chart 7
TIPS SURGE ON INFLATION CONCERN... In yesterday's message, Arthur Hill showed the recent downturn in the 20+Year T-Bond ETF (TLT) and warned that that the long end of the bond market is starting to weaken. One reason for that would be some fear of inflation. Chart 8 shows the TLT (price bars) forming a lower high during October and nearing a test of its September low. That weakness is contrasted by a surge in Treasury Inflation Protected Securities (green line) over the last month. If investors were starting to worry about inflation (arising from a falling dollar and rising commodity prices), one way to react would be to sell the long bond and buy TIPS (which appears to be what they're doing). Another warning sign for Treasury bond is the fact that bond yields are near historically low levels and oversold. The weeky bars in Chart 9 show the 10-Year T-Note Yield (TNX) close to its 2009 low and with an RSI reading below 30. Oversold bond yields mean overbought Treasury prices. The Fed can't have it both ways. It wants to keep rates low and the dollar weak to stimulate the economy and create some inflation. With stocks on the rise and commodities surging, however, it's just a matter of time before that combination starts to pull bond yields higher as well. Any rise in rates would no doubt pull more money out of bonds and into stocks and commodities (not to mention TIPS). We may be approaching that turning point.
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Chart 8
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Chart 9
GOLD HITS NEW HIGH... Gold has rallied to a new high on a weaker dollar. So have stocks tied to gold and silver. One of nice things about the slight pullback over the past week is that it presented us with a more visible support point to use. The hourly bars in Chart 10 show GLD support at 129.51. Chart 11 shows GDX hitting a new record as well. Initial GDX chart support is now visible at 56.11, with even closer gap support (see box). Traders with a shorter time horizon (and who are getting a bit nervous on the long side) can now place some stoploss protection below the lows of the last week.
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Chart 10
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Chart 11
DOW INDUSTRIALS STILL IN UPTREND ... Chart 1 showed transportation stocks nearing a test of their spring high. Chart 12 shows the same to be true with the Dow Industrials. That represents another challenge for the new uptrend. Cyclical, seasonal, and technical odds continue to favor higher stock prices. For that positive view to be maintained, however, t's important that any Dow pullback stay above its August high (and early October low) aound 10700 (see green line).
