Wednesday, September 3, 2014

S&P versus Transports - 65 year chart

Here's something that's been on my mind;

click to enbiggitate
I don't know how to do a ratio chart in Yahoo Finacne, or if such a thing is possible. So you'll have to use your mathematical imagination, if you have one.

Anyway, I've been looking at the 2000-2009 bear market, and saw that some of the best performing stocks were transports - railways, to be specific. If you bought UNP in 2002, for example, you never experienced a bear market whatsoever. Some other forms of transport like JBHT also did fantastic.

And when you look at this long-term chart, you see something interesting. The transport index started to stink in 1998.

From 1998-2000 is really where you saw the height of NASDAQ tech stock excess.

So, if you're the type of person who loves to accuse the markets of lying, then you should have seen the lie from 1998-2000 by seeing the weakness in transports. After all, if the S&P was an indication of continued US economic strength, then why wasn't anyone making any money transporting goods? Hm?

The idea behind this is that the transports are the true indicator of underlying growth. You can see it from say 2003 onward: while the S&P had entered a long multi-year consolidation, the Transports were much less horizontal.

You could read that whole 1995-2012 area this way:

1. from 1995-1998, the S&P properly reflected US economic strength because it advanced in lockstep with the strength in transportation, and the transportation stocks are strongly tied to the economy, and the transports don't lie because all they do is measure the movement of goods, which is what an economy is.

2. From 1998 to 2000, the transports showed massive weakness in the economy, but the S&P ignored that;

3. From 2000-2002, the S&P fell back down as the lie became apparent;

4. From 2002-2007, the transports advanced strongly as the US economy continued to grow, but the S&P lagged because it was still overvalued compared to what goods were actually moving;

5. From 2007-2009 everything pooped a lung;

6. From 2009 to the present, the transports have outperformed, because the ten year bear market made the S&P lag as everyone reacted with disbelief.

And as to point #6, there is an analog in the above chart: look at what happened from 1974 to 1981. There also, the S&P had been in a secular bear market consolidation, and the transports were actually worse off from 1968 to 1974. Then, the transports outperformed out of that 1974 bottom for a good 7 years, til the rest of the market finally quit piddling their panties, and after that the two ran in lockstep to 1998.

1974 to 1998 is 25 years, by the way. So if this time isn't different, you still have a long time to make money.

And in 2011 the transports printed an alltime new high. Did anyone let you know about that when it happened? Hm?

Anyway, the point of all this was that it looks like you can easily tell when the broad equity market is in a bubble: it's when the broad market is still advancing while the transports are stalled or declining. That's what happened from 1998-2000.

And by the way, you won't see this on a day-to-day chart; it'll be the longer-term chart that you have to see it in. So don't bother listening to any clown doomer who says "OMG the transports have gone down for a whole week! Sell sell sell!"

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