Transportation Stock decline worth monitoring
- SPX and QQQ both closed out the week with mildly positive gains, though well off early week highs and some increasing evidence that a decline should be forthcoming
- Transportation Stocks fell sharply on Friday, making this a sector to watch carefully
- High TRIN readings aren’t necessarily always positive for stock returns
Well, the new month and quarter got underway with the traditional seasonal tailwind that many expect might kick off a new quarter. SPX and DJIA showed fractional gains on the day and week, though fell sharply from earlier week intra-week highs to finish near the bottom of the week’s range. Increasingly, this downward momentum caused by latter week consolidation should start to put more weight on SPX to turn down in greater fashion into mid-April. At present, one still can’t rule out a bounce to test this week’s highs, but I expect this to prove short-lived and turn back lower. Importantly, 90- and 180-day cycles from prior highs and lows both intersect early next week, and my cycle composite shows a decidedly more negative bias for April than the rally for March. Bottom line, a rally back to 4650-75 should prove sellable, while any decline under 4455 kicks off a larger pullback. Overall, staying defensive looks proper.
Transports excessive decline is seen as a negative
While the majority of the US Stock market seemed rather “sleepy” on Friday, the violent decline seen in many Transport stocks looks to be a negative technical development that likely continues in the short run.
Trucking, Logistics, Rails and Air Freight issues all slumped, and stocks like CHRW 1.15% , ODFL 0.49% , NSC -0.96% , and JBHT -2.77% all fell greater than 3% during Friday’s session.
Unfortunately, this group had shown some interesting strength during the early part of March and constructive outperformance before Friday’s About-face. As seen below, this failure to get back over 280 in the Ishares Trust US Transportation ETF (IYT -0.42% ) represented the third failure to break out of former highs established initially near May of 2021. Attention now turns to late February lows, which might be tested given the severity of Friday’s (4/1) decline and will need to hold in order to prevent additional technical damage.
Overall, given that leading sectors like the SOX and also Transports are both falling more than 2.5% in trading, it looks early to buy into these groups given the move to multi-day lows.
High TRIN reading could very well be a negative for Stocks
Many might have noticed that the ARMS index reading after Thursday’s trading was excessive, finishing up more than 2.6%. For those inexperienced with this indicator, this measures a ratio of the Advancing vs Declining issues as the Numerator. The denominator of this equation consists of a ratio of the Advancing Volume divided by Declining Volume. Often during sharp market declines, if there turns out to be an overbalance of selling which causes very high declining volume, the Denominator of this ratio to be very small and as such, the Arms index (TRIN) reading will register a high reading, potentially above 2. Often following a pattern of negative trading, if markets show a high TRIN reading, this can be thought of as being capitulatory, often marking a bottom. This is specifically a key part of my toolkit that I utilize for evidence of market capitulation.
However, as has been the case in recent weeks, if stocks are sharply positive heading into the day where TRIN registers a high reading, it often can turn out to be far less positive going forward. With the help of my colleague, Ken Xuan, I looked at instances where SPX had been up more than 5% in the trailing 10 days. Interestingly enough, as I suspected, the forward returns were far less robust than usual, and out of five occasions that SPX has been up more than 5% on a 10-day period and TRIN registers a +2.6 reading or above, this has led to negative occasions in 2 of 5 instances on a 60-day forward return.
Another interesting study that covered far greater instances was run to study times of a high TRIN reading +2.6 and studied times of positive and negative trading days leading into this high TRIN reading. Interestingly enough, the times of poor trading preceding the high TRIN reading were followed by more positive returns.
Conversely, the periods of very positive returns heading into a high TRIN reading were much more negative than positive going forward, by a more than 2/1 ratio. Overall, similar to many of the runups we’ve seen in the last decade which then roll over and produce high declining volume, I’m more inclined to think this is a negative for US stocks, not a positive.
SPY vs FEZ shows a very long-term trend of serious outperformance
Finally, it’s worth pointing out that SPY has recently turned up even more parabolically in its relative relationship to the EuroSTOXX50 in the time post the Russia/Ukraine war than in years past. This makes intuitive sense, if Europe is less Energy independent than US, or has a greater percentage chance of recession than the US. One would expect this should be upward sloping. Yet, incredibly enough, this has been ongoing for more than a dozen years and now appears to be growing even stronger. Bottom line, those looking at hedging their portfolios might consider Europe as a short before considering US, simply given the long-term uptrend in relative performance by the US.
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