Jamie Dimon started talking about how the economy was heading for a recession last year.
Lately, more and more analysts and CEOs are hinting the same.
One of the simplest and historically effective methods for analyzing where the economy is headed is offering a similar outlook.
You don’t need a PhD or any formal training to understand it – just five minutes of your time and some common sense.
As a matter of fact, if you want to do it in its simplest form, you could just sit on the side of the road.
On a recent visit with a friend, he shared a story about the head of commercial banking at Fifth Third Bank (FITB) in Cincinnati.
Someone in the national media had asked the banker how he and his team would forecast where the economy was headed since the economy was so critical to their planning.
His response: “I just look out my window each day and count the trucks.”
If you’re not aware, Fifth Third Bank’s headquarters has a direct view of the confluence of I-75 and I-71.
The bridge that both highways share over the Ohio River carries more than $1 billion of commercial freight every day.
To say that it is a main artery for the country’s GDP wouldn’t be an understatement.
The banker was able to gauge where the economy was going by simply noting how busy truck traffic was over the river.
There’s a similar method used in the stock market: the Dow Theory.
To simplify, the Dow Theory is based on the idea that a bull market must be confirmed by a rally in the transportation sector.
It makes sense.
Higher stock prices are driven by a strong economy, and a strong economy is driven by a strong transportation market.
That’s not happening right now.
Just ten days ago, the market had a relatively rare moment.
All three of the major indices closed at all-time highs on the same day.
The transportation index was nowhere close to being able to confirm those highs in the market.
The iShares Transportation Average ETF (IYT) spent that same day trading more than 5% off its all-time highs that were posted way back in March.
That is far from being in the neighborhood of being able to confirm the market’s recent highs and serves as a warning for both long- and short-term investors.
The last time we saw a similar situation was in early 2022.
At that time, the S&P 500, Dow Jones Industrial Average, and the Nasdaq 100 all posted new all-time highs in January.
The IYT had made similar highs just short of a few weeks ahead of the major indices, already starting its retreat to lower levels.
The transport stocks appear to have been ahead of the curve this time around.
Last quarter’s earnings are the reason.
The season was brutal for United Parcel Service (UPS), JB Hunt (JBHT), and Knight Transportation (KNX) as their results and outlook shook the stocks.
There were some winners in the sector, including Federal Express (FDX), but FedEx was still trying to rebound from the previous quarter’s earnings which had missed Wall Street expectations.
Overall, the outlook for the transport companies has weakened as the post-pandemic shipping pipeline was cleared just as demand appears to be slowing.
Looking forward, shipping companies are seeing rates drop as retailers adjust their inventories for slowing consumer demand.
To add a dash of economic data to the situation, this morning’s ISM Manufacturing Index was lower than expected along with the latest Construction Spending data.
Looking at the price chart for the Transports, I’m seeing a familiar pattern that tells me that the market is ahead of the economy as is normally the case.
In late April, we saw the IYT’s 50-day moving average shift from a bullish to bearish outlook as the poor earnings results from April weighed these stocks down.
Since then, we’ve seen three attempts for the index to start a meaningful rally that could pull it out of its tailspin fail.
The last failure started today.
Today, the IYT shares broke back below their longer trending 200-day moving average, a line that should be trying to act more strongly as support.
But as with most things in the market, it’s all about timing.
The timing of this morning’s poor economic data is causing the “smart money” to read the writing on the wall.
Transports, commodities, and bonds all three have been moving lower, a combination that sends most fundamental investors into cash or other “safety trades.”
Also notable about today’s IYT chart is the huge volume that the index is trading lower on.
This represents the importance of the 200-day moving average break and suggests that Wall Street is exiting the building when it comes to transportation stocks.
As I always try to do, let’s break down where this bearish move takes the transport stocks and how to turn this trend into a profit.
First, to compare this outlook to 2022 wouldn’t be the right thing to do.
While 2022 did represent a bear market for stocks, it did not represent a recession or a slowdown in the economy.
Remember, the economy was going too fast then due to the recovery from the pandemic.
Remember what I said about timing?
The timing took it easy on the transport stocks in 2022.
Instead, you need to think 2008-2009 with this comparison.
That’s the last time we saw a recession, the condition that punishes transport companies.
We’re 5% from breaking into a long-term bear market trend with the IYT shares.
That break would likely draw another 15-20% decline in the price of the transportation ETF, drawing a line at $50.
How do you turn this outlook into a trade?
The first move is to avoid the transportation stocks.
A list of the IYT’s top ten holdings is in the chart below.
Note that the sector represents a great cross-section of the transportation sector.
Uber (UBER), CSX (CSX), Delta (DAL), and Old Dominion (ODFL) all in one index.
These are the stocks to avoid within the sector at minimum.
Speculative traders may choose to eye in-the-money long-term put options on the IYT shares.
This approach allows the longer-term bearish trend to play out while avoiding single stock headlines adding volatility to the trade.
I’ll highlight one of the transport companies in the IYT in this week’s Fast Profits trade idea.
About the Author
Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.