Transports Are Flashing a Warning Sign

 | Jan 19, 2012 | 7:30 AM EST
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Corrects an earlier version of this column that contained incorrect information about the DJTA.

I've been feeling overwhelmed by the sheer volume of news to digest. God bless Mr. Market for being hooked up to an electronic support system known as high-frequency trading, allowing it to make swift decisions on real-time information (even if those decisions aren't always right). I, on the other hand, am resigned to writing down every major event and drawing idea branches from them, and then sticking in on the refrigerator. Just take a gander on what we mortals have had to analyze this week:

  1. IMF wants to raise its lending capacity to $1 billion by asking members to cough up $600 million. The market embraced this news under the premise that it backstops the EU debt crisis once and for all. Another interpretation, less frequently discussed, is that the IMF knows more than us and is assuming a pre-emptive stance before a negative event. Hmm.
  2. The EU savior and AAA stalwart Germany slashed its 2012 growth outlook.
  3. The World Bank cut its global growth outlook by the most in three years. I didn't really care about this development; the World Bank isn't exactly a market-mover.
  4. Greek bondholders were offered $0.32 on the dollar as opposed to an already trimmed $0.50.
  5. Industrial production missed consensus.
  6. PPI continues to ease, suggesting consumer prices will march lower and the Fed may look to stay highly accommodative.
  7. China's GDP posted above expectations, but it's still cooling.

I have probably neglected to mention a couple things, but there's only so much room on the fridge. With all these data points to digest, it would have been easy to overlook less obvious nuggets. First, the Dow is at a six-month high in the face of a downbeat earnings season. Second, Goldman Sachs (GS) sounding the alarm on the economic recovery should have gotten more attention. Finally, the Dow Jones Transportation Index has begun to trade sideways, ignoring the bullishness that has enveloped the broader Dow Industrials.

Industry-specific data have been mixed, to put it mildly. Airlines carried 1.5% fewer people year over year in October, paced by a 3.0% decline in international flyers. Freight shipment growth on a month-to-month basis topped out at 0.9% in September, coming in at a drop of 0.2% in October and a measly 0.1% bounce back in November. As I have noted before, when the crowd is saying, "Do this!" (buy stocks, in this case) you owe it to yourself to think, "Maybe I should do something else" -- this may be one of those "Aha!" moments.

The transports scheduled to report earnings next week -- CSX (CSX), Swift (SWFT), Kansas City Southern (KSU), Arkansas Best (ABFS) -- all have stock prices that have flat-lined in January after breaking out in mid-December. Fundamentally, these companies have benefited greatly from pricing initiatives (and to a lesser extent volume). If the industry data are any sign of slowing volume, and pricing for goods and services (as measured by PPI/CPI and even seen in the import price report, for example) are poised to moderate, then transport stocks could be sending us a stand-alone message -- take the gains and run. Above all else, there may be a macro message here that we had a growth hiccup in the handoff from the fourth quarter to the first quarter.

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