The Dow Theory Has Spoken

From my last week post about the possibility of the US economy experiencing a double dip, I have suggested to keep an alert on the Dow Theory and keep a watch on some transportation stocks for clues to determine if recent slowdown of the US economy is a double dip or simply a temporary slowdown.

I put up some charts for some transportation stocks that might provide some signs on the future direction of the US economy. As seen from the updated charts below for these transportation stocks, some of them have already broke above the upper channel (red line).






Furthermore, the chart for the DJ Transportation index also shows it has closed at an all time high on Friday, July, 1, 2011, and the Dow Theory has spoken.




Although the DJ Industrial index did not close at a new high above its April 29, 2011 close, but this non-confirmation signaled by the Dow Theory indicates a new high for the DJ Industrial is yet to come.




The significance of the new closing high from the DJT is it is an indication the recent slowdown in the US economy could turn out to be only temporary; ‘slow patch’. When the DJ Industrial index confirms with the DJ Transportation index, then a strong case can be made that the US economy is on a road to recovery. Until then, I will keep watching for the next Dow Theory signal with a bullish bias for the intermediate term.

Double Dip

Recently, the phrase “double dip” started to be heard once again as numerous economic reports showing signs the US economy is not recovering as expected. Even with the QE2 (time will tell if this is an ill conceived experiment), it did not help reduce the US unemployment rate or get the US GDP to grow at a level that will take the US economy out of the recession. Worst yet, $600B spent and no significant amount of new jobs were created.

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.