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Why The Stock Market is Ready for a Breather
Posted By joeahlert On March 5, 2012 @ 5:00 am In Articles,Featured,John Carter,Trading Stocks | No Comments
You see, the $TRAN index is the most important leading indicator for the stock market, as well as the economy.
And yet, when I mention the Transportation Index to people, telling them it’s important, they usually smile and raise their eyebrows. After all, they think I’m kidding. The transports? Isn’t that the railroads? In the age of iPhones and Facebook, how could that be important? In fact, who cares!
Indeed, when the transportation index was first created by Charles Dow in 1884, the index contained 90% railroads . . . and a steamship company. Enough said.
But times have changed. And so has the index.
Today, railroads make up just 18% of the index. The index also includes other key companies that are the lifeblood of the economy. Airlines for one. If the airlines are doing well, it is a sign that business and consumers have money to spend. Trucking is also packed in there. If the economy is humming along, then Walmart and McDonalds are bringing in more goods and more beef over our open highways to be sold to eager consumers.
But that’s not all. Delivery services like FedEx and UPS are also in this index. It seems every day I receive a package from Amazon or Zappos . . . and those packages are delivered by UPS. And who wants to use the post office these days anyway? They can’t even figure out how to make money with a monopoly!
Last but not least, there is marine transportation, which involves huge container ships transporting goods around the world. Little things like . . . crude oil. As well as products from China and other countries that are imported into the U.S. to sell to eager consumers as well as businesses. In fact, the Baltic Exchange Dry Index (BDI) is a considered a leading indicator for economic activity. What does it measure? Shipping freight rates. In early 2008, these rates started to plunge, telling us loud and clear that economic upheaval was upon us.
In other words, the transport index is not only relevant, it is also the first to react to any slowdown (or pick up) in economic activity. It’s an incredibly relevant . . . and profitable . . . heads up as to what is really going on in the world, before it hits the headlines.
And right now, the transport index is in trouble. It peaked on February 3, a month ago now, while the Dow and the S&P 500 continue to eke out new highs. Since February 3, the transports have sold off over 4%, breaking through key support levels and moving averages.
I realize that 4% doesn’t sound like a lot. However, when the transports start selling off while the rest of the stock market continues to rally . . . it’s a screaming indication that all is not well.
It would be like driving down the freeway at 60 miles per hour and suddenly noticing that steam is pouring out from underneath your hood. Would you keep driving and ignore it? Or would you pull into a gas station to see what’s going on with your engine?
There are two things to keep in mind here. First, this “heads up” gives you time to protect your portfolio. Economic slowdowns hit transports first, and everyone else second. This means that when a stock market is about to sell off, the transports start selling off first. That is what they are doing now.
The best way to protect your portfolio now is to buy put options on the SPY, which is the Exchange Traded Fund representing the S&P 500 stock index. I’m looking for SPY to trade back to $130. I’m going to take advantage of that move by picking up some April $140 put options.
Second, the time is shaping up to short and buy puts on specific stocks in the transportation index. FedEX for one. This stock peaked near $97 on February 13 and has since been on a steady slide. I’m looking for the stock to fall back to $85.
The transports, although considered boring and obsolete by many, is one of the more important tools for staying ahead of the crowd.
And when it comes to investing, the ones who stay ahead of the crowd are the ones who stay in the money.
John Frederick Carter
Article printed from Absolute Wealth: http://www.absolutewealth.com
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