By Jim Donnelly, Olson Global Markets
The Dow Jones Transportation Average (DJT) closed the week trading near an all-time high, but is also approaching a test of long-term channel-top resistance at the 7,200 level. This upward sloping channel-top (on a semi-log basis) dates back to February 1998 and has contained all previous rallies. Since the DJT is considered to be a leading indicator of both the economy and the stock market, a failure to rise above 7,200 could suggest that a period of economic cooling and equity price consolidation could be on the horizon.
Although a number of transportation stocks are concurrently approaching their respective highs, all are in overbought conditions and appear to be stretched. They include: Kansas City Southern (KSU); Kirby Corp. (KEX); GATX Corp. (GMT); FedEx (FDX); United Parcel Service (UPS) and others. Some are forming bearish Head & Shoulders patterns like Union Pacific Corp. (UNP).
Supporting the strength in transportation stocks on Friday was an unexpected jump of 204,000 in non-farm payroll. That, as well as a better-than-expected 2.8% rise in Q3 GDP appeared to move up the time-table of the taper occurring in December 2013 rather than in March 2014, however. While yields on U.S. Treasury 10-year notes did rise by 13.3bpt to 2.746% on Friday, a knee-jerk drop in equity prices did not. For the time being, that response should bee seen is a big plus for equities.
That being said, as good as these economic reports were, the November 1st report of a decline in October PMI to 51.1 from 52.8 did not presage a ramp up in economic growth. A rise in European unemployment to a record high of 12.2% along with a tiny rise of 0.7% in Eurozone inflation also was a concern to global growth and prompted Mario Draghi to cut short-term interest rates to a record low reading of 0.25% from 0.50%. Moreover, the sharp rebound in stock prices and rise in 10-year yields on Friday came as a result of a 204,000 rise in non-farm payroll, but clearly not because an outsized decline in total civilian employment, which shrank by a sobering 720,000 jobs (even when including the 204,000 figure). That oddity in the employment data, however, could due to the government shutdown experienced earlier in October and is likely flawed. If so, closer attention to future revisions should be paid.
Over the short-run, the wealth effect of record high stock prices coupled with declining gasoline prices could keep the economy buoyed in coming weeks including the holiday travel and shopping season. In turn, that could help transportation stocks move higher still. Nevertheless, a failure to rise above the 7,200 level on the Dow Jones Transportation Average coupled with a rise mortgage and/or interest rates could be a warning that growth expectations for next year could fall short of current hopes.