Rising Rates Are Boiling The Frog, Weak Railroad Volumes, Geopolitical Chaos

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Last night in “The Market Is About To Break – Part II”, I explained how rising interest rates are tightening economic conditions and hollowing out the stock market. The analysis was primarily technical in that I showed how the Magnificent 7 are holding up the entire market while the Equal Weight S&P (RSP) has broken down – not to mention small caps. I said that the 200 DMA for the market weigh S&P was once again in play – in fact the S&P is within a few points of it as I write (7:58am) – and that when it broke it would be a wake up call to investors that the bear market rally from October 2022 is over.

Those are the most important dynamics to understand about the current market situation. But I want to add a couple other details this morning. There are three leading railroads in the United States that deliver goods across the country: Berkshire’s Burlington Northern, Union Pacific (UNP) and CSX (CSX). Both UNP and CSX reported weak 3Q23 volumes and pricing on Thursday. UNP’s revenue carloads were -2.7% and revenue per carload -6.7% compared to 3Q22. CSX’s numbers were -2.3% and -6.1%, respectively. In traditional Dow Theory, when the transports are not confirming the industrials strength, that’s a divergence that bears watching. While the economy has changed a lot since Dow Theory, it still remains true that the transports are an indicator of economic activity since they measure the business of moving goods around the country. And the railroads are at least flashing yellow at the moment.

Also concerning is the deteriorating geopolitical environment. Obviously everybody is focused on Israel-Palestine at the moment and I have written about the possibility of escalation there. But there are other concerning developments as well. Russia’s war on the Ukraine is ongoing and Russia’s Legislature has revoked its ratification of the Comprehensive Nuclear Test Ban Treaty and ended limits on missile technology sales to Iran. Putin and Chinese Leader Xi Jinping are getting closer. China’s pressure on Taiwan continues to grow. (See Walter Russel Mead’s “A World Without American Deterrence” [SUBSCRIPTION REQUIRED], WSJ, Friday October 20, for the source of the details in the above paragraph). Investors should hedge risks here by owning defense stocks.

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