Transports rarely predict a market change

by Wayne Ferbert on March 28th, 2012

In Monday’s blog, we wrote about how the Transport sector is often viewed as the sector that shows the way for the future market values. The rationale has always been simple: producers of goods need to build things from supplies SHIPPED to them and then they need to SHIP their finished goods back out. So, busy Transports have a good view in to the future markets.

We were doubtful of that claim, however. So, we ran a simple data comparison – not too complex. We looked at the NASDAQ Transportation index performance over the last 12 years – since January 3rd, 2000. We examined every 20-day market window. If the Index deviated in performance from the S&P500 by 5%, we examined the subsequent 6 month broad market performance. The deviation could be positive (indicating future market promise) or negative (predicting future market malaise). The deviation had to be at least 5% - negative or positive.

In addition, we looked at unique circumstances of deviation only – meaning that if the 20-day performance finishing on April 2nd was more than 5% deviation and the 20-day window finishing on April 3rd was also more than 5%, we considered that ONE event. In other words, subsequent expiration days for the 20-day window that were over 5% deviation were considered one event. There had to be a break with a day that finished the 20-day window without a 5% deviation to be considered a change.

Then, for each of these events, we looked at the market performance in the subsequent 6 month window for the S&P 500. In other words, did the deviation in the Transportation index predict the proper direction for the market for the subsequent 6 months. If the Transportation index out-performed the S&P 500 in the 20-day window, then we looked for a positive market result. If the Transportation index under-performed the S&P500 for the 20-day window, then we expected the market results to be negative for the 6 months to follow.

The results were mixed – at best. We counted 144 unique events where the 20-day NASDAQ Transportation index deviated by more than 5% from the S&P500 index. Of those 144 events, 70 times the market (S&P500) moved in the direction predicted by the out- or under-performance of the Transportation index. Of course, that means that 74 times, the broad market moved in the opposite direction that the Transportation index predicted.

Digging deeper, we found that of the 70 times that the market moved as the Transportation index predicted, the index had out-performed in the 20-day window 42 times – versus 28 times where the index under-performed. Of the 74 times the index was wrong, the index indicator for the 20-day window was out-performed 49 times and under-perform 25 times. So, you can see, even when split by the indicator, it is still very close to 50/50 (ie, 42 vs 49 and 28 vs 25).

I decided the dig a little deeper and see if there was a difference between the data pre-2008 and post-2008. But it didn’t make a difference. There were 91 events where the Transportation index deviated by more than 5% prior to 2008 – and 45 of them gave off the wrong indicator. The other 46 were right in their direction. So, the post 2008 were also about 50/50 with a split of 29 wrong and 24 correct.

The net/net here for me is simple: the Transportation index is rarely a good predictor in the short-run of what is going to happen to the market in the longer run. Instead, stick to the fundamentals of the market and don’t try to time it!

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