Tall Tales And Transports
"The Transports are rallying, hitting new all-time highs. That's extremely bullish for the broad market."
One of the tallest of tall tales in markets is the myth of all-powerful Transports. When Transportation stocks are hitting new highs, as they are today, all is said to be well in the world. Investors can safely buy the broad market with an expectation of nothing but blue skies ahead.
Back in July 2011, we heard the same fable from a renowned pundit. Transports were hitting new highs with the S&P 500 (SPY) still below its peak in April. "Bullish," he said.
What followed? A sharp sell-off and 20% decline until a bottom was hit in October.
I can still recall the days in early June 2008 when the Transports rallied to hit new highs. "The bear market is over," I remember one so-called "technician" declare without an ounce of reservation.
What followed? The worst declines since the Great Depression, in a bear market that took the S&P 500 down 57% before bottoming in March 2009.
This should not have come as a surprise. Indeed, we had seen this movie before. In January 2001, the Transports hit a new all-time high, leading many to say that the broad market declines which began in March 2000 were over.
What followed? The sharpest losses bear market that took the S&P 500 down 51% before bottoming in October 2002.
Should we conclude from these examples that Transports hitting new all-time highs without the S&P 500 is actually a bad thing? No, certainly not. The average forward returns from this scenario, while slightly below average, are still positive.
What we can say, though, is there's nothing in the data to suggest that Transports hitting new highs are an unusually bullish signal. And as we saw in 2001, 2008, and 2011, there's nothing to suggest that sharp declines can be ruled out when Transports are strong. To the contrary, the last three bear markets all saw Transports hitting new all-time highs just prior to the steepest losses.
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