Transports, Utilities, & Iran

     From April 8 through April 23 2010  the DJ Transports powered up another 351 points. At the point of strongest acceleration the RSI reached a peak of 83.14, a remarkably high reading for a major index. This astounding display of leadership and strength is puzzling to me on a fundamental basis because it is difficult to  conceive of the improvement in the volume of physical commerce that this juggernaut of an index seems to be foretelling. I am construing its meaning to be that the economic recovery will be stronger and more persistent than had been expected, though I still can't believe it presages some sort of explosion in the quantity of goods being shipped. I emphasized in my previous letter that the leader ship of the Transports was the key to the durability of this primary bull market. It is hard to believe that the index won't take a rest very soon, but it is not yet acting exhausted. It seemed to be working off the extreme overbought level of its RSI through sideways action of its relative strength versus the S and P 500 during the week of April 19-23. 
     If the Transports do move into a prolonged correction/ consolidation, I will be scrutinizing the action of the dormant DJ Utilities Average to see if it comes to back life and starts moving upwards towards and beyond its Dec. 14, 2009 high of 406.72  The Utilities are considered a bellweather index for a number of reasons. This fact would make an assault on their old highs if it should occur, a very meaningful event. The exception to the bellweather attribute of the Utilities is that they can be a haven for safety and yield in bear markets and recessions, such as they were in 2001-2004. But they did help lead the first major upsurge of this bull market, along with the Transports, to its mid December 2009 highs. Therefore I would looked upon their renewed strength as a manifestation of their bellweather nature rather than of merely a flight to safety in a environment of crumbling financial assets.

     On the question of market sponsership, I still don't believe that this market is being primarily driven by the public. Such members of the non-professional public as are participating are mostly doing so from the long side, but they are not the driving force behind this bull. This market thus far is more of a quiet, Paul Dysart type market with big money sponsership accumulating slowly and inconspicuously. We undoubtedly are into the Dow Theory 2nd psychological phase where the market rises in response to visible improvement in business (in today's case, more of an improvement in profits than in business) and the public participates in moderate but increasing  numbers. As Dow Theorist Robert Rhea wrote, the second phase is usually the most deceptive, stretched out, and difficult to interpret of the 3 primary market phases. Russell's Big Money Breadth Index tells the tale of what the large interests are doing, and its story is that they are accumulating, although the week of April 19-23 did reveal a deceleration in the index's rate of increase. 
    Both the McClellan Oscillator and the McClellan 5% Index declined enough to relieve their overbought condition but not become very oversold. The 5% indicator, in particular, really only declined to a less overbought status. If these two can again move towards the strongly overbought region, it will mean that the breadth of the market is going to surge up noticeably before any appreciable decline from the present price levels. Strong markets can remain neutral to overbought for a long time, but we do like to see an oversold reading once in a while to squeeze out some of the excesses and reduce risk.
     The end result for the week of April 19-23 2010 is that the DJ Industrials and Transports, the cumulative A-D line, the S and P 500 and most other indexes and Averages closed at post March 9, 2009 recovery highs. The DJ Utilities did not
even make a serious attempt at new highs, but remain in a trading range currently bounded by 375 on the bottom and just below 390 at the top. Their sensitivity to interest rates may be the major factor in their hesitation. Since many investors buy them for yield, they have some of the trading characteristics of bonds. And bonds at this time are under suspicion of being in the early stages of a bear market. But the Utilities also have the properties of an industrial index as well since they produce products such as energy and water supply. In particular, demand for energy increases in proportion to increased production and transport of goods.
Thus it is also very sensitive to economic expansion. Which of these two attributes is now dominant in determining its price action is hard to say, but it would be a definite harbinger of a continuing bull market if the Utility Index were to reassert its strength and rally to new recovery highs.
      The following is my reaction to speculation about Israel possibly attacking Iran's nuclear processing plants without cooperation or participation by the US:
      Of course Israel has contingency plans to attack Iran's nuclear facilities, but Obama will not give Israel permission to fly over Iraq, regardless of pressure from McCain. Furthermore, McCain's base among conservatives is rapidly eroding because he is a foreign military adventurist but weak on internal American security (open borders advocate). George W. Bush put us in too a weak financial position and too overextended a military position to carry out major action against Iran. It's true that we now have huge bases in Iraq but the Iraqi Shiites will oppose our use of them against Iran and, where the US is involved, the Iraqi Sunnis don't believe that the enemy of their enemy is their friend . So we would probably be throwing Iraq into violent turmoil if we tried to use our bases in Iraq to attack Iran. The Stratfor article of 2009 clearly outlines why the task is beyond Israel's ability to successfully accomplish on its own, even if it could overfly Iraq.  In actuality, because of the dispersal and hardening of the nuclear sites, it would not be an easy task even for US air power.