This is the ‘magic number’

  • Revealing the ‘magic number’
  • Crash Market Investor

For the past two weeks, we’ve referred to the ‘magic number’.

We’ve identified it as a key number for investors to watch.

What is the ‘magic number’?

We revealed all in last night’s special event, ‘The Day the Bull Market Ends’.

It was a resounding success. More than 3,000 people tuned in. They listened to colleagues Vern Gowdie and Ryan Dinse, and your editor, explain the threats faced by the world’s markets and economies.

We explained where the threats could come from. The consequences of those threats. And, how to deal with them.

That’s the key with any event like this. It’s no good just scaring the bejeezus out of everyone. Solutions. Problems need solutions.

We believe we provided that last night. More details, including the reveal of the ‘magic number’, below…

Markets

Overnight, the Dow Jones Industrial Average closed down 28.97 points, or 0.13%.

The S&P 500 fell 0.38 points, or 0.02%.

In Europe, the Euro Stoxx 50 index ended the day down 0.79 points, for a 0.02% fall. Meanwhile, the FTSE 100 gained 0.77%, while Germany’s DAX index lost 0.04%.

In Asian markets, Japan’s Nikkei 225 index is down 51.02 points, or 0.25%. China’s CSI 300 is down 0.16%.

In Australia, the S&P/ASX 200 is down 22.15 points, or 0.38%.

On the commodities markets, West Texas Intermediate crude oil is US$46.91 per barrel. Brent crude is US$49.29 per barrel.

Gold is trading for US$1,245.41 (AU$1,578.70) per troy ounce. Silver is US$16.33 (AU$20.70) per troy ounce.

The Aussie dollar is worth 78.89 US cents.

Revealing the ‘magic number’

The ‘magic number’.

If you’re a long time Port Phillip Insider reader, you’ll know that we pay close attention to the Dow Jones Transportation Average.

The ‘Transports’ is the lesser known of the two key Dow Jones indices.

As the name suggests, the ‘Transports’ index measures the stock market performance of US transport stocks. Companies like FedEx Corp [NYSE:FDX], United Parcel Service Inc. [NYSE:UPS], and Southwest Airlines Co [NYSE:LUV], are members of the 20-stock index.

The reason we follow this index is that in order for goods to go from A to B, they need to be transported.

That means by road, rail, or air.

Even in the internet age, or rather, especially in the internet age, the movement of goods has become more important.

Along with transporting goods from business to business, today, millions of packages flow from business distribution centres, directly to households.

Blame, or thank, Amazon.com Inc. [NASDAQ:AMZN] for that.

So, to put it simply, the Transports index, provides a clue about the short and long term health of the US and global economy.

For a time, about a year ago, things didn’t look so good. The index had trundled along, without going anywhere for 12 months. But since then, that’s changed. The Transports index is up over 18%.

Things must be looking good for transport companies.

However, regardless of that, we’ve noticed an interesting phenomenon with the Transports index. It involves a technical indicator. And it involves something that happens nearly 100% of the time when a specific thing happens.

This is where the ‘magic number’ comes in.

Even if you only have a passing interest in technical analysis, you’re probably familiar with moving averages. A moving average is about the simplest out of all the technical analysis studies.

But that’s OK. Because even though most folks know, or are familiar with moving averages, we’ll bet that fewer than one in 1,000 have ever looked at the relationship between the Transports index and the 20-day moving average.

Take this chart below.



chart image

Source: Bloomberg
Click to enlarge

On every occasion bar one, over the past year, when the value of the Transports index has closed below the 20-day moving average, the index has fallen the following day or on the days following that.

It’s almost like clockwork.

And if you go back five years, it’s even more remarkable. The index has fallen below the 20-day moving average on 36 occasions (37 if you include last night’s price action), and on all bar three occasions, the same thing has happened — the index has continued lower.

What does this mean?

Well, it doesn’t necessarily mean that a major crash is about to occur. I’m not saying that. As you can see from the chart, after falling, the index has been volatile, and then risen.

But what I am saying, is that this is about as good a signal as any, to show that the market is at risk of at least a short term downturn.

As I say, it’s almost like clockwork. In fact, you could trade these moves, with a pretty good strike rate of predictability.

So, could this be an indicator of a potentially bigger fall?

In our view, without a doubt. It’s why we’re referring to it as a magic number. Until last night, the index was above the moving average.

But last night, the index fell below the moving average. It means we now have a negative ‘magic number’, of -0.95.

If history is anything to go by, further falls for the market are likely in the days ahead. Keep an eye on this ‘magic number’. It could be key to the direction of the market.

Crash Market Investor

Last night we launched a brand new investment advisory, Crash Market Investor. It was to coincide with our special event, ‘The Day the Bull Market Ends’.

To know more about the service, go here. I believe this is the most important investment advisory we’ve ever launched.

Cheers,
Kris