Making a Case for a Bear Market, pt. 2

In part 1, we looked at fundamental reasons why the stock market can become a bear. Here, we will look at technical reasons. We will look at the Dow Jones Industrial Average and its relation to the transportation sector of the economy.

Background
The Dow Jones Industrial Average (DJI) and the transportation average (TRAN) should be correlated. This is from the Dow theory. The Dow theory states that a strong economy would be shown through the TRAN and the DJI. This is because the industrials need to get their products to places where they can be sold. If transportation companies are being used, then companies are shipping products to places where they are sold. In theory, if the TRAN were to go bear before the DJI, then it represents less sales, and less profits.

DJI

Here you can see the DJI peaked in mid-June and has been down since.

TRAN

The Transportation average began to fall in mid-March, about three months before DJI began its descent. You would expect DJI to follow. 

However, the TRAN is made up of different types of shipping methods. We can take a look at individual sectors and see what is happening, and what it implies.

DJUSTK

This is the trucking sector. It has a bearish pattern, a double top and it has fallen around 17.5%. The trucking sector will give tell you about domestic shipping. It will tell you about shipping from factories or ports. The lowering price implicates the outlook of the trucking sector will fall, which means products are not going to be shipped.

DJUSRR

The railroad sector has fallen at a very rapid rate. This is correlated with domestic shipping as well. The sector has fallen about 35%, starting in March.

DJUSAF

The delivery services has fallen about 17% from peak to trough. The falling prices in this sector imply that people are not shipping goods, or ordering goods to be shipped. This is more correlated with consumers, not so much industries.

DJUSMT

This is the marine transport index, and this has fallen 48% since mid-October. This index will tell you about imports and exports internationally. With this index you can see that global production has slowed.

DJUSAR

The graph here does not look like much has happened, but the index has actually fallen about 26%. This is actually counter-intuitive to what you would be expecting. With falling gas prices, airlines should be generating more profits. However, we can read this as people are choosing not to fly as much anymore. Which would mean people are starting to save money. When people decide to save, the economy gets weaker. Less spending means less GDP.

Conclusion

As you can see, the transportation sector tells a different story of the economy than the DJI does. Imports and exports have fallen, showing that global producers are not selling as many products internationally. The domestic shipping industries are not transporting as many products within the US, which signals a slowdown in the domestic economy. 

A global slowdown in shipping can signal a global economy slowdown. As you read stock charts, it is important to look for these types of connections. Technical analysis assumes that the market discounts all available information. This means that when a sector falls, it can have other implications, rather than just the transports are going down. Making these connections will allow you to read into the economy. Rather than waiting every quarter to run the fundamentals of each company, you can look at sector price action, and gauge things for yourself, before the fundamentals come out.