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Transports to Bears: You're Wrong


If the market were really going to fall further, why are Transports outperforming? Could the bears be wrong after all?


People find it far easier to forgive others for being wrong than for being right.
--Joanne Kathleen Rowling

I have continued to argue for some time that 2012 is likely a year of reflation, and that stocks can rally significantly more as inflation expectations return to markets. The "mini-correction" I first addressed on April 6 has resulted in the US stock market still positive for the year, while most international markets have cratered on eurozone fears. With bond yields (IEF) at record low levels, it begs the question of whether a further breakdown in equities is coming because the bond market is "right," or if the surprise will be a massive move higher from these levels in equities into year end.

So here's my question for the bears who believe we are on the verge of a severe decline to come. If markets were going to continue to breakdown, then why is it that those stocks which "ship" things (Dow Transports) are showing strength relative to those stocks which "make" things (Dow Industrials)? Take a look below at the price ratio of the iShares Dow Jones Transportation Average (IYT) relative to the SPDR 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.

I've drawn in a "Ratio Support" level which the ratio is indeed bouncing off of in a way reminiscent of the Fall Melt-Up of last year following the Summer Crash. If there were a feeling that stocks really would further break down and that the global economy would come to a halt, wouldn't you expect Transports to break down further relative to Industrials? Ask yourself: Is the negative narrative too easy sounding to be right? Could the bond market be wrong after all?

I maintain my belief that the true Black Swan for 2012 is betting on a big move higher in stocks because no one else believes it can happen.

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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