Action in Dow Jones Transports, Utilities Signaling Caution

Action in Dow Jones TransportsThe equity market and other capital markets are gyrating on the rise in 10-year Treasury yields. There’s been a lot of unusual movement in currencies as well.

Speculation regarding what the Federal Reserve is going to do about quantitative easing and the lull between earnings seasons are definitely factors.

There is always equity market uncertainty in the weeks before the end of a quarter (though the Dow Jones industrials have held up well). Investor sentiment reflects the collective ambiguity of whether earnings will hold up. In a sense, there’s not enough data to keep equity market speculators happy with their bets. When speculators can’t justify their positions, capital markets get cranky.

Both gold and oil prices have been bouncing off the weaker U.S. dollar. There’s always churn before a quarter ends.

I repeat my view that an equity market sell-off could occur at any time and that investors who are long should not be surprised by some pronounced downside (I wouldn’t sell Dow Jones blue chips).

The correction that both Wall Street and many investors expected did not transpire. The willingness of institutional investors to be buyers has been robust.

The equity market was led this year by a pronounced breakout in blue chips and components of the Dow Jones Transportation Average. It’s still very much worth following these companies and transportation stocks for overall market direction.

The Dow Jones Transportation Average is well off its high of 6,568.41, and this is meaningful. The retrenchment, while well deserved, is a sign that the rest of the equity market is ahead of itself.

Alaska Air Group, Inc. (NYSE/ALK) is down markedly (over 10 points) from its recent high of $68.00. This meaningful pullback is representative of what I consider fair game for the equity market on the whole and is just one more slight bit of evidence favoring a correction.

Following transportation stocks for the market’s overall direction is old school for sure, but I still think it’s worth doing. I’d like to see the transportation index stay above 6,000 for the medium-term health of this market, but if there is to be a pullback, 6,000 is an easy target.

The Dow Jones Utility Average has also blasted higher since January, but it began its retrenchment before transportation stocks. This index is down about 12% from its peak and components were fully priced.

The Dow Jones Industrial Average itself is only down slightly from its high, and this illustrates the zeal that big investors have for owning the equity market’s safest names. (See “Big Investors Still Buying Big-Caps; Will They Be Right?”)

On the cusp of a new earnings season, the choppy trading action in all capital markets should continue until corporations report or there’s news from the Fed.

It does matter if the Dow Jones utilities and transports don’t turn back upward; they are now foreshadowing retrenchment.

Significant caution remains appropriate, and I would not be buying the equity market before solid confirmation from earnings reports.