Looking Like a Phony Rally

by | Sep 25, 2012 | General

Slowing growth and a strong stock market—not our favorite combination

Long-term, we remain optimistic about stock investing. However the evidence of trouble in the short-term continues to pile up.

Below is a chart comparing the S&P 500 with the Transportation Index since the beginning of 2012. The transports are actually down on the year and have been trending down since winter even as the broader market continues to rise.

The Transports (trucks, railroads, and airlines) are much more sensitive to the economic environment than the broad market, and they tend to weaken before the market tops out. Technicians who follow this stuff are very unhappy that these lines are moving in opposite directions. In a “healthy” market they move up together.

It has been 3 ½ years since the market low of 2009 and the indexes are up well over 100% since then. (Our portfolios are up even more, we are happy to report) We’ve come a long way and the market seems tired.

The market is also approaching its all-time high levels, both for the Dow and the S&P 500. So the question is this: are we finished with the long-term downtrend, which began in 2000 or do we need to deal with another leg down? Probably not the violent drop we saw in 2008, but a significant decline just the same.

Of course we don’t know the answer to that question, but it seems prudent to us that we should look closely at the chart below and wonder what a third leg down would look like.

Given all the unresolved issues facing the world and the mountains of debt that need to be paid-off or written-off, the fundamentals tend to suggest a market top in the near-term is more likely than a breakout to new highs.

So this is the hand we’ve been dealt. In our next note we will let you know what we intend to do to protect the profits generated during the last few years.

Best regards,

Daniel A. Ogden

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