Is the US economy moving toward a double dip recession? The answer depends on who you are listening to. In one camp, the talking heads blame the Japan earthquake, the tornados, and the rising oil prices for causing this temporary slowdown. And the opposite side is citing the massive liquidity the FED injected into the system via QE2 did nothing to promote business expansion, instead, it only fueled rising asset prices (stocks in particular) and rising commodities prices including the price for crude oil.
So who does the market believe? Looking at the Dow Jones Industrials index, it appears it is heading down in anticipation of a slowing economy.
DJI:
But the Dow Jones Transportation index is showing some hesitation in agreeing with the DJI. The DJI is nearing a breakdown to test its 200 SMA, while the DJT is above its supporting trendline and the 200 SMA, and it could be setting up to move back to the May, 2011 level.
DJT:
Some might point out the recent strength of the DJT could be due to falling crude oil prices. To gauge the future strength of the DJT is due to the improving manufacturing sector and not primarily due to falling crude oil prices, keep an eye on some of the rails and shipping stocks. Watching how some of these transportation stocks perform in the coming weeks will give us a better picture on whether a double dip is real or the recent slowdown in the US economy is temporary.
JBHT, NSC, UNP, CNW, CHRW, CSX:
If the price of these stocks breaks below the support level indicated by the line drawn in black, then double dip could be in the card. But if the price of these stocks breaks above their recent high, indicated by the red line, then this slowdown could be temporary. While the talking heads debate on the double dip or no double dip, I will be keeping an eye on these transportation stocks and pay attention to the market when the Dow Theory speaks.
