Manufacturing Seems to be Killing Transports

If anyone is familiar with Dow Theory and how the transports confirmation of the Industrials plays a major role, you may find this interesting even though the Dow-Jones Industrials aren't quite as Industrialized as they were back then. In any case, goods need to be shipped, al of the information over the last several weeks have pointed to a world wide manufacturing recession or "Contraction" and in many cases these manufacturers already have adequate stock on the shelves, thus Capacity Utilization is falling, as we saw today the employment sub-index is falling, there are no new orders, exports are falling, etc.

Historically the transports (which I remember, but was a little surprised at the time) have responded well to QE, even better than the Dow-30 during specific QE environments. However now there's a clear divergence between the two which triggers part of Dow Theory, the "Von-Confirmation" part as liquidity, printing and dollar debasement generally, clash with the reality that companies aren't shipping as much.

The Dow-30 vs the Transports...

 Here the Dow (green) vs Transports (white) have tracked each other very well, whether it was during the 2008 decline or the 2009 bottom and the QE1 program, at the Jackson Hole announcement of QE 2, transports actually outperformed the Dow-30, the strong or even positive correlation lasted right until the first 2012 top area in March when we identified weakness and started building core short positions. Recently and since QE-3, transports have again diverged away from the Industrial counter-part. So are transports calling another reversal as they did in March-May 1 this year?

 A closer look and the March 2012-May 1 is clearly negatively divergent as transports fail to make a new high and since, they have not only failed to make a new high, but in fact have come unglued even worse.

 Here's an hourly chart of the two, note after today's pre-market Empire State Manufacturing, Transports performed badly.

This is an interesting area because demand for transports and the resulting earnings apparently look like they can't hide behind open ended printing. As to whether they have a greater impact as traditionally thy do, we'll have to wait and see, but the initial break away from the Dow is as strong if not stronger than anything we have seen since well before QE1 was launched.