FYI | Aug 19 2013
Kathleen Brooks, Research Director UK EMEA FOREX.com
The Dow Jones Transportation Average is one of the key lead indicators for US stocks markets, according to Dow Theory. After all, if goods are not being transported around the country it suggests sluggish growth, which is bad news for stock prices. After making a record high on 1st August this index has come under pressure. It has fallen for three days straight and is now close to a pivotal support level at 6,297, the 100-day moving average. Below here is a bearish development, which opens the way to further losses back to the 5,900 level, which is also the 200-day moving average.
So why is this index falling? It tends to move inversely to Treasury yields, as the 10-year Treasury yield has risen to its highest level in more than 2 years, reaching a high on Thursday of 2.77%, this has weighed on stock markets. Since stock investors tend to “price in” events 6-months in advance, even though the US economy looks strong today, the investment community is nervous that rising yields could put the brakes on growth and weigh on future corporate profits.
Since the Dow Jones Transportation Average is a lead economic indicator, if it falls below the 100-day moving average support level then this is a bearish development for the broader stock market.
Takeaway: Rising Treasury yields are starting to impact the equity market. If the Dow Jones Transports index falls below key support then expect further declines in the broader index as we lead up to next weekend’s Jackson Hole central bankers conference. This is the market’s next chance for further clarification on the Fed’s plan to start tapering its asset purchases and will be a key driver of financial markets in the medium-term.
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