The Russell 2000 and Transportation Market Show

July 19, 2018

Mish's Daily

By Mish Schneider


blankEconomics 101 teaches one about supply and demand.

Demand refers to how much of a product or service folks will buy. Supply is how much the market can offer.

When Supply and Demand are equal, the economy is at equilibrium.

“The allocation of goods is at its most efficient because the amount of goods being supplied is exactly the same as the amount of goods being demanded. Thus, everyone (individuals, firms, or countries) is satisfied with the current economic condition.” Investopedia

For the last month in the markets, I have watched the Russell 2000 (IWM), which with 2000 small caps stocks manufactured in the U.S., is a solid measure of the supply side.

I have particularly watched IWM and its relationship to Transportation (IYT), with its basket of railways, cars, airplanes and trucks, a solid measure of the demand side.

That relationship until today, indicated a disequilibrium-or more supply than demand as consumer buying seemingly slowed.

What happened today that could put the relationship back into equilibrium?

On the supply side, IWM outperformed the other 3 indices.

On the demand side, IYT rose above the 50 daily moving average into an unconfirmed bullish phase.

Now, before you think to yourself tariffs are no biggie, the economy is on a steady course and all is right in the world, we must also consider a few factors.

  1. IYT needs to close a second day above 193.10 or the 50 DMA to confirm the bullish phase
  2. IYT must fill the gap to 194.21.
  3. Then, should 1 and 2 occur, the dollar has to remain strong and the interest rates steady.

Why number 3?

Because Jerome Powell, Chairman of the Federal Reserve, and Trump may have just parted ways.

Powell has been anticipating a possible equilibrium of supply and demand. He has spoken optimistically about the strong economy and the need to keep the pedal on rates.

Trump came out today and said he does not want to see higher rates and he prefers a weaker dollar.

Old school says lower rates, more borrowing, more stimulus for the economy. New school-not so fast.

The economy is already overheated. Wages have not increased. The inflation target by the Fed has been met.

So what does this all mean for our showmen IWM and IYT?

Maybe nothing.

But, with commodities struggling in the face of the dollar and the EU struggling against U.S. economic dominance, it could emerge into something if Powell is now thinking he will be pressured to quit his job.

As I have written before, I feel for Powell between a rock and a hard place. He has to navigate monetary policy under a very difficult situation.

Raise and risk stalling the economic growth. Maintain or lower rates and risk rampant inflation.

What does that have to do with supply and demand?

Rising prices will kill demand faster than a speeding train hurling towards a pedestrian who is standing on the tracks.

S&P 500 (SPY) Still far from the January highs at 286.63. Now, must hold 277.00

Russell 2000 (IWM) Let’s put it this way. If this does not move up over 170 and into new highs, then this was the rally to sell as it has made 3 lower highs and cannot clear the reversal topping pattern from June 20th.

Dow (DIA) 250 pivotal.

Nasdaq (QQQ) Broke 180 pivotal area. But unless it breaks 177.28 may not mean much.

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