By Jim Donnelly, Olson Global Markets
Despite overbought conditions on monthly charts, the Dow Jones Transportation Average (DJT) is again testing long-term trend line resistance now at the 6,755 level. No doubt, the Fed’s unexpected decision to keep the level of security purchases at an $85 billion monthly clip has played a big roll in the current vibrancy.
Continued strength in railroad and airline stocks and a recent display of strength in shipping stocks have also contributed to the strength in the DJT. While the degree of domestic and global economic strength is an on-going debate, it is clear that a series of reports from China, Japan, and Europe and of course the U.S. have demonstrated that freight, cargo and passenger profitability is gaining some traction.
Still, a political showdown in Washington over the debt ceiling and Obama-care that threatens a government shutdown is now brewing. And while the U.S. involvement in the Syrian crisis as been toned down quite a bit, it has not really gone away. Moreover, there are a number of analysts, investors and CEOs that see growth expectations muted right now. If that assessment is accurate, further upside gains in the DJT might be restrained as well.
It might be worth pointing out that since 1996, the DJT tested this key trend line resistance in 1997 and again in 1998, just before Russian ruble collapsed and triggered a crisis on Wall Street due to leveraged positions at Long Term Capital Management. The next time this same trend line was tested was in 2007 and (almost) again in 2008 just before the housing/banking crisis hit Wall Street. No doubt, the fact that the DJT is again testing this same resistance barrier is troubling to economic historians.
The technical set-up on long-term charts of the Dow Jones Transportation Average clearly favors a correction to begin soon. In a world where it does not reward investors to fight-the-Fed however, a breakout to the upside would likely catch a number of investors off-sides.
One last wrinkle to consider is the roll that the Dow Jones Transportation Average playing in Dow Theory. It purports that transportation stocks must lead industrial stocks in order to advance a bullish trend. Thus, a break above key long-term trend line resistance currently at the 6,755, could ignite a broad-based advance in equity prices, if it occurs. If it does not however, a period of distress could emerge instead.