BNY Mellon: Confirmation Signals
BNY Mellon: Confirmation Signals
By Simon Derrick, Chief Currency Strategist, BNY Mellon
- Recovery in Dow Jones Transportation Index has been muted
- Recovery in shipping indices over past week also modest relative to declines seen earlier in year
- Select commodity prices also struggling to regain recent highs
While Charles H. Dow, founder and first editor of The Wall Street Journal, might never have used the term "Dow Theory", his editorials provided the basis for William Peter Hamilton, Robert Rhea and E. George Schaefer to create its basic tenets. One of these was that stock market averages must confirm each other.
The argument was simple enough: given the scattered manufacturing base of the US, a pick-up in demand for manufactured goods would be reflected both in the price of the companies producing the goods (including those contained in the Dow Jones Industrial Average) and those involved in transporting them (the components of the Dow Jones Transportation Index).
When the two stock indices diverged this was an early warning of a potential trend change in the offing.
Given that physical products and people still need to get from A to B, the DJT still provides a useful litmus test about some of the underlying forces within the US economy.
On the same theme, it seems reasonable to look to indicators of shipping costs globally to provide some indication of the health of the global economy.
The picture that the DJT paints of the US economy is therefore an interesting one.
While more general indices such as the S&P 500 pushed to trend highs late last week, and stand not far from the historic highs hit around the end of Q3 2018, it is noticeable that the DJT has struggled this year.
Not only does the Index stand over 10% down on the all-time highs hit last summer but it’s also noticeable that the post-March 8 rally has struggled to make it back even to the trend high hit in mid-February.
In other words, while Federal Reserve Chairman Jerome Powell s’ comment that the Fed does “not feel any hurry” to change the level of interest rates again might have provided a boost to risk sentiment overall, sentiment towards the transport sector remains cautious.
Looking more globally, the Baltic Capesize Index (capesizes typically transport 170,000-180,000 tonne cargoes such as iron ore and coal) is down 85% from its August high and now stands not far from the multi-decade lows hit in early 2016.
Much as with the DJT, there has been recovery of sorts since March 8. However, even after this, the Index remains over 70% down on where it was at the start of the year. In short, it appears that improvements in risk sentiment in financial markets may not be being reflected elsewhere.
Similar patterns are emerging elsewhere.
BOT wheat futures (on a continuation chart) have recovered 9% since March 8 but still remain over 12% down from their mid-February highs and are off over 22% since last August.
Even commodities that should be doing well, such as precious metals, are struggling to regain the peaks they had made by late February, despite the continued reassurances from the Fed.
Put simply, a number of indicators have yet to fully confirm the mood of optimism.