History (something old) can guide current decision making (something new). One of my favorite “old” factors is the price action in transportation stocks, which is traditionally indicative of the future of the stock market. At least that’s what Dow Theory, one of the earliest incarnations of technical analysis, puts forth.

Initially described by Charles Dow, the theory is built on the notion that if either the Dow Jones Industrial Average (INDU) or the Dow Jones Transportation Average (TRAN) makes a new high which is then confirmed by the other average, the market is in an uptrend.

Over time, the theory has evolved into the notion that the new highs in the averages indicates that the economy is in an uptrend. This is based on the perception that investors are more likely to invest in stocks when the economy is also in an uptrend.

This theory has further evolved into one in which new highs on any index, such as the Nasdaq 100 (NDX) should be confirmed by other indexes as well as the market’s breadth as in the New York Stock Advance Decline line (NYAD). And if that sounds familiar, it’s because Dow Theory is essentially the founding principle of technical analysis.

Technical analysis, the practice of reviewing price charts to decipher price trends, is an excellent way to document and make sense of complex systems, such as the stock market. Complex systems are composed of agents (components) that interact with one another and the environment as they seek a point of emergence, i.e. the transition to a new operational level.

Taken at face value, a cursory look at INDU and TRAN, above, suggests the economy is at a neutral point, perhaps with an early upward bias. On the other hand, as I describe below, a more granular examination of money flows into key sectors of the stock market paints a more bullish picture, while posing an interesting set of questions for the Federal Reserve.

Ever Heard of Project 44?

My sudden interest in the transportation stocks began a few days ago when I read an article, courtesy of Freight Waves.com, an excellent provider of news on the transportation sector. The gist of the article is that Project 44, something new, is laying off 10% of its workforce.

So, what is Project 44? The short answer is that it’s an IT/AI data management company. The long answer is that this company’s actions may be telling us a great deal about what lies ahead.

That’s because Project 44 is a central cog in the transportation sector these days. Its software gives its clients a real time and detailed view of their supply chain. Its clients include companies like FedEx (NYSE: FDX), Owens Corning (NYSE: OC), and Starbucks (NSDQ: SBUX) and they rely on Project 44’s offerings to manage shipments, orders, and inventories.

In other words, Project 44 is a crucial piece of the “just in time” economy. For companies it means that they know the status of every container on a cargo ship, the status of every package in route to anywhere in the world, and more importantly it helps them to keep tabs on how to manage the costs related to their supply chain. The AI-related portion offers suggestions as to how to manage future events based on current data.

For you and me, there is a personal touch, because Project 44’s software lets us know where our package is in real time via the tracking numbers we receive on confirmation emails.

Getting Granular

Cutting to the chase, it seems as if Project 44’s job cuts are related to what the company’s CEO, Jett McCandless, sees as “serious headwinds” for the company and the economy. Moreover, his company is not alone. There has been serious shrinkage in the transportation sector’s venture capital funded digital sector.

According to Freightwaves: “Digital freight forwarder Flexport eliminated 20% of its employees in January. Digital freight platform Convoy announced restructuring and layoffs in February. Autonomous trucking company startup Embark Trucks laid off 70% of its staff and legacy load board provider Truckstop.com cutback its workforce by an undisclosed amount in March.”

Under the hood, the data gets a bit more concerning as:

• Dry van rates are falling;
• Global demand for goods is slowing; and
• Domestic economic uncertainty now supports the view that there will be no recovery for the freight sector in the second half of 2023.

Do Investors Agree With The Indexes?

Let’s give the first nod to Mr. Dow by reviewing the price chart for the SPDR Transportation Index ETF (XTN), which shows that according to the trading crowd, the worst may be over for the transports, and thus possibly the economy. I base this on the fact that XTN has rebounded above its 200-day moving average and is in the early stages of what could be a meaningful price breakout.

A deeper dive shows the Accumulation Distribution Indicator (ADI) and On Balance Volume (OBV) are starting to rise after the shellacking the ETF took in late 2022. This is cautiously bullish, which suggests investors are moving money into the transportation sector, just as the bad news is starting to pile up. As a contrarian, I like this scenario.

New Highs in Tech

A big reason for the quiet action in XTN is the rally in the technology sector, which is dragging the rest of the market higher. This, of course, is due to the market’s severe case of AI fever. You can see this reflected in the action of the Invesco QQQ Trust (QQQ), which houses mega-cap tech stocks in the Nasdaq 100 Index, including the usual suspects such as Microsoft (NSDQ: MSFT) and Alphabet (NSDQ: GOOGL).

Comparing QQQ’s recent price action to XTN’s, you can see the rally in tech is contagious. Furthermore, the ADI for QQQ is in a strong uptrend, signifying that short sellers are leaving in droves. OBV is nearing a breakout, which suggests that skeptical buyers are starting to become believers.

It’s All Connected

What brings these seemingly unrelated ETFs together are AI, the Fed and their effects on the economy. Project 44 is an AI-linked venture, since its business is in monitoring the status of the supply chain to the most sensitive point, delivery of products, for its clients. Yet, its link to the traditional transportation sector via its connection to cargo traffic on the inbound and outbound sides of the economy is hard to ignore.

Project 44’s data is indicative of a weakening economy. Without product demand, there is no need for transportation services. Project 44 is expecting a decrease in its business, which is why it’s laying off employees. It would seem logical that it’s about to increase its dependence on AI to keep the doors open.

Which leads me to the Federal Reserve and its upcoming Federal Open Market Committee (FOMC) meeting slated for June 13-14. The central bank has hinted that there is a difference of opinion among its voting members as to whether interest rates should rise in June. FOMC meeting minutes recently reported “some” members favoring further interest rate increases, while “several” members were willing to take a wait-and-see attitude.

The Bottom Line

Something old, the transportation sector, is suggesting that perhaps the worst is over for the economy and that AI is a central cog. Something new, the suddenly AI-fueled technology sector, is already betting that the future will be run by artificial intelligence.

It’s all about the balance between what the central bank’s rate hikes have already done and how the system is adjusting. The big bet by investors is that the Fed seems to be getting close to the end of its rate hiking cycle.

Perhaps the Fed will factor in the deflationary effects of AI. Let’s hope so, because something’s got to give soon.