Dow theory implies that when the country recovers from a recession, one of the first signs will be that the volume of materials shipped will increase. This led to the creation of the Dow Jones Transportation average, because investors wanted to track the prices of industrial stocks against the average of the stocks of companies transporting materials for them.
I wanted to take a look at how world marine shippers have performed compared to the DJT recently, and created the chart here. DJT is comprised not only of marine shipping companies, but also truckers, air freight, rails, and delivery services. Using the Transports Fund IYT as a proxy for DJT, I plotted it against SEA. Aligning the two charts seemed to go best using the collapse of March 2009 as a reference.
As you can see, they track quite well through the March "V". Beginning in May, however, the shippers clearly moved out in front. Their advantage persisted through early June, at which point it began to decline. This corresponds loosely to the period of expansion in the Baltic index. During this period, the news media was following closely the Chinese stocking of bulk materials, especially iron ore. Graphically, we can see now how much the world shippers benefited from this by comparison, because the US Transports for the most part did not.
In a world in which shipping recovery depends largely on Chinese demand, a play comes to mind in which we can hold a position in SEA long, and short IYT. If you wish to consider this kind of trade, the ratio would be approximately 5 shares of SEA for each of IYT. The chart shows us that the gain will be transitory, so once there is a gain over 10% or so, the trade might best be dissolved or reversed.
Written by Skymist.