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Transports Now Signaling a Buy


Transports have flip-flopped. While they were offering a sell signal just a few weeks ago, it looks like all is clear now for futher gains ahead according to Dow Theory.

Traffic signals in New York are just rough guidelines.
-- David Letterman

I've countered for the past several weeks the idea that the Dow Jones Transportation Index was signaling trouble for broader equity markets. The media focused on this given the run up we've had so far this year, arguing that "Dow Theory" means stocks are likely to weaken as a result. The argument goes that unless things that ship things (transports) confirm things that make things (industrials), then a rally is suspect. The problem with this thinking is that it is only one data point, and as I have referenced in my prior Lead-Lag Reports here on Minyanville, there was not yet enough confirmation to make a decline a high-probability scenario.

And now we suddenly find ourselves in a situation where transports may be giving a buy signal. Take a look below at the iShares Dow Jones Transportation Index ETF (IYT) relative to the Dow Jones Industrial Average (DIA). As a reminder, a rising price ratio means the numerator/IYT is outperforming (up more/down less) the denominator/DIA.

Sure, transports collapsed relative to the Dow in February, but notice the spike up that appears to now be occurring. The breakdown in February coincided with the spike up in oil prices. But now that China is purposely slowing down its growth rate and thus commodity usage, the expectation may be that oil prices will not spike up in the way once feared. So the sell signal now becomes the buy? The reflation theme continues as I keep stressing, with 2012 looking more like 2003 and 2009 every week based on confirming intermarket relationships.

Twitter: @pensionpartners
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No positions in stocks mentioned.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

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