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Mish's midweek update: The most important sector to watch right now

Mish's midweek update: MarketGauge's Mish Schneider offers her expert analysis of US markets.

Here in the US, the overall market has sold off to what many analysts consider major support levels. Nevertheless, Goldman Sachs believes that the US Federal Reserve can still manage a soft landing if the following criteria are met:

1. Energy prices fall
2. The pressure on the labour market, particularly wages, eases
3. Supply-chain disruptions improve
4. The strong dollar and the tightening of monetary policy help inflation come down

On the other hand, Bank of America believes that the US could be heading for a deeper recession if the following events occur:

1. Outflows from global equity funds continue
2. The Fed continues aggressive tightening
3. Inflation remains high
4. The 95% of Americans still fully invested in a 401(k), a type of retirement plan, start liquidating

When analysts disagree in this way, which indicators should traders focus on? For us, the transportation sector is a key barometer of economic activity, as it captures supply and demand trends. If supply outweighs demand, businesses cut back on production and lay off workers, leading to a slowdown in the economy. In contrast, if demand outpaces supply, businesses expand to meet that demand, leading to a healthy, growing economy.

Transport ETF outperforming

We use the iShares US Transportation ETF [IYT], shown in the chart below, as a measure of the transportation sector’s performance. The US accounts for 96.21% of the basket’s exposure.

This IYT chart illustrates the sense of uncertainty over where the economy and markets are heading. The price, down 4.7% over the past month, is hovering above the September low, just below the 50-day moving average (DMA). MarketGauge’s proprietary Real Motion indicator is holding above the 50-DMA. The Leadership indicator, which shows that IYT is outperforming the benchmark, demonstrates why we are so keen on watching this sector.

United Parcel Service above its moving average

IYT’s top-weighted stock is delivery company United Parcel Service [UPS], the price chart for which is shown below. UPS currently sits above its 50-DMA. 

Union Pacific displaying relative strength

IYT’s second biggest holding is in railways company Union Pacific [UNP]. Incidentally, the rest of the fund’s holdings are in freight, airlines and – perhaps somewhat surprisingly, given that its share price has fallen by half in the last 17 months – Uber Technologies [UBER].

As the chart below indicates, Union Pacific sits above its 50-DMA. Moreover, our Real Motion indicator points to positive relative strength against the benchmark.

Manufacturing data came in better than expected

Yesterday, the Institute for Supply Management's manufacturing data, a key indicator of the state of the US economy, pointed to a better-than-expected improvement in business activity in August, with employment and new orders up, while costs fell slightly. In light of this, is the economy really struggling as much as some commentators would have us believe?

To answer this question, we must of course keep an eye on the dollar’s strength, food and energy prices, rising interest rates, and the inverted yield curve. But whatever happens, if the transportation fund IYT holds steady and goes up in price, opportunities will continue to pop up – not only in the transportation sector, but in many other risk-adverse sectors as well.

Mish’s ETF support and resistance levels 

S&P 500 (SPY) 390 pivotal, 385 support, 400 resistance
Russell 2000 (IWM) 177 support level to hold if any chance of more upside 
Dow (DIA) 309.15 a gap low to hold from 15 July
Nasdaq (QQQ) 288 support and, if it holds, must clear 297
Regional Banks (KRE) In a bearish phase with key support at 59.80-60.00
Semiconductors (SMH) If the September low of 204.18 fails, 200 could become the next support level; if that holds, resistance to clear is at 210
Transportation (IYT) 225-226 support, possibly rising back above 229
Biotechnology (IBB) 123 resistance, 117 support
Retail (XRT) 61.50-62.00 key support, worth watching as another leading indicator 

Mish Schneider is MarketGauge’s director of trading education and research. Read more of their market analysis here, and subscribe to their YouTube channel here.

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