Tag: psychology of the call

Psychological Financial Fusion and The Dow Jones Transport Index

Posted on by The INO.com Team

Today I asked the team from Psychology of the Call to open our eyes to an index that is often overlooked...or misunderstood as it relates to current or historic trends! I for one really didn't know too much about DJT and how it's been connected to our economic situation. Please enjoy the lesson and be sure and drop by Psychology Of The Call and tell them we sent you!

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The Dow Jones Transportation (DJT) Index is a trusted leading economic indicator followed by wise men. The index was created by Mr. Charles Dow in 1884, a time when railroads were as important as today's internet superhighway, perhaps even more so. The index consisted of 11 stocks of which 9 were railroads, and all aboard have been derailed of late.

The deleveraging and divesting of every asset class in the cosmos has not been kind to the transport industry's equity holders, yet this sudden business shock may work to strengthen their business models as the world begins to dig itself out of this unprecedented trough.

Today's DJT is made up of 20 stocks of which only 4 are railroads: Burlington Northern (BNI), CSX Corp (CSX), Norfolk Southern (NSC), and Union Pacific (UNP). The other 16 stocks are airlines, trucking, and shipping.
http://en.wikipedia.org/wiki/Dow_Jones_Transportation_Average

Interestingly enough, today's talking heads insist on quoting the S&P 500 index as the best leading economic indicator, yet the DJT Index is 68 years its’ senior. That takes us back to just after President James A.. Garfield (R-20th) became the second U.S. President to be assassinated. The unfortunate event enabled Vice President Chester A. Arthur to take power.

Here's a maximum time frame chart that doesn't even go back to its beginning in 1884:

Since corporate financial officers (CFO) are always striving to lower costs, many today would think their jobs have become easier since oil has fallen over $100/barrel, but that can't be further from the truth.

As CFOs experience this lower cost, the global economic slowdown is taking an even bigger toll on sales, share price, earnings per share, and margins. Profit margins at many of these companies are contracting due to desperate attempts to hedge what was a run-away oil market. Some airline CFOs stock piled crude supplies after it broke through $100/barrel, then $90/barrel, and so on. Thus the current price of sub $40/barrel has them miffed as global deleveraging is causing a domino effect of business contraction with the added burden of a higher crude cost supply glut in the short-term, yet not necessarily all are managed the same.

Even though the DJT's are a cyclical bunch, they usually signal an economic recovery before most other sectors since they must deliver raw materials from point A to point B. The raw materials are then utilized by manufacturers before eventually being sold at your Best Buy, WalMart, or Sears. The signals aren't looking too positive from a fundamental aspect of late since GDP and unemployment continue to suffer. The short-term technicals aren't giving us any bullish confirmations either. Notice  the DJT's dragging the S&P lower in this 3 month chart, foreshadowing a lower stock market ahead:

^GSPC = S&P 500
^DJT = Dow Jones Transportation Index

Since the DJT index is a corner stone of market history, forward-thinkers would be wise to follow it and use it in addition to the S&P when setting up pivot points for trades.

The financial sector is still a large weight inside the S&P index, and yet it hasn't dragged the S&P below the DJT in the last 3 months. The index is not signaling a sustained economic recovery anytime soon. The longer-term (5 year) chart reveals fairly solid footing in the 2,600 range, yet forward-thinkers respect the over-shoots that a climactic bottom prints.

While you can invest in thousands of stocks that are not directly part of the DJT, just about every stock you choose will be at the mercy of some transport cost(s). So please give some respect to the Dow Jones Transportation index; it has stood the test of the most powerful judge, Father Time. If you share our optimism in an eventual economic recovery, monitor this index in the next few days, weeks and months; it may help you profit.

Psychology Of The Call

Is now the time for a bear market rally?

Posted on by The INO.com Team

I've been in contact and reading the blog Psychologyofthecall.com for a few months now and from what I've read they seem to be on top of a number of issues. I asked them to answer one question for me...Is now the time for a bear market rally? Here's their answer:

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The ongoing global financial crisis has made perma bears look like geniuses, yet the Psychology of the Call team (POTC) senses the imminent appearance of a bear market rally for four good reasons.

1) President elect Obama's first speech and chief of staff pick, Mr. Rom Emanuel, were very bearish for the market; we are confident both of those negativities will change soon. POTC believes Mr. Obama's goal in the coming days and weeks will be to do everything popular to be re-elected to a second term in just four short years. He understands that half of U.S. citizens are in some way affected by the mayhem of the recent sell off; Americans expect transparent leadership and policies now.

It's that second pivotal term where Presidents are more inclined to show their true colors, especially in terms of openly hell bent left or right policy. We remain confident and are prepared for a lag effect Thanksgiving Obama rally to begin this week, as his centrist appointments and policies begin leaking through hedge fund insiders. We are not waiting for New Year to enter long positions, as that seems to be the easiest and most ‘herdish’ trade today: we remain forward thinking contrarians and are going long the S&P emini contracts into Thursday's death spike.

We believe President elect Obama will appoint some Wall Street friendly names to his first administration, doing so to satisfy his political appetite to win that critical no holds barred second term in 2012.

Yet, if he chooses to select only hard line left wingers, the market will not rally. After witnessing the extremely well planned and hard fought victory, we would be shocked to see a concentrated (leftist) cabinet:. We are confident that will not occur.

2) The pressure from Warren Buffett on President elect Obama to call for a change in mark to market accounting from the SEC, or announce a huge infrastructure stimulus plan plays a factor in our short term bullish call as well.

Berkshire Hathaway just reported a horrible quarter, and even if Buffett is okay with paying higher taxes, we know he does not want to see his almost perfect legacy wither, wilt, and die in his waning years.
Other recent Buffett investments in Goldman Sachs (GS) and General Electric (GE) have underperformed as well, and both of those companies will survive this wickedly panicked market.

3) The financial sector could begin to stabilize as it shrinks. The S&P is heavily weighted with oversold financials.  Approximately 20% of the S&P value lies in financials, so be cautious. Regional banks could begin bouncing with 50%+ buy-out premiums. Rumors abound that Citigroup (C) is very close to bidding for a regional bank with government TARP money.
Story here

This would ignite a type of forest fire under financials, forcing many perma bears to cover their seemingly bullet proof short positions.

We will take advantage of what we view as monopoly money about to be used to boost stocks like Regions Financial (RF) and/or Suntrust Bank (STI).

4) Intel's (INTC) (see MarketClub's latest prediction here, ed note) report of lowering numbers after hours creates the perfect set-up for hedge funds to close or enter new positions before they step foot on Capital Hill, Thursday. Please remember these managers are either long, short, or in cash at this point, so we expect the INTC news to shake out the wounded, weak, and desperate long herd, and flush out the dynamic kings of cash, specifically Steven Cohen and Paul Jones: Story here

These managers are patiently waiting to take over your shares when your fear factor boils over Thursday, turning their greed gauge on auto pilot in search of inexpensive generals. Will you allow them that satisfaction?

Four examples of best-in-breed generals at these levels are: Apple (AAPL), America Movil (AMX), Chicago Mercantile Exchange (CME), and Google (GOOG).

POTC feels the S&P index could settle above 1,000 by Thanksgiving, and as the bear rally gains momentum from one or two other positive developments mentioned above, then 1,100 on the S&P could well be reached before we wish you a Happy New Year.

Psychologyofthecall.com