Lets look at the Transports and this write up to see how accurate it is shall we? First we see that Bank One accurately states that the transports outperform early in an economic recovery.
BPTRAN has been at 100 in 2004. We know that the index simply cannot get any stronger even if the stocks associated with it continue to rise:
3 Year Weekly Charts:
The next assertion that Bank One Makes is that the DOW Transports soften before a recession. They certainly did in advance of the market top in 2000 and the eventual recession that followed:
More than likely when we see the Dow Transports begin to struggle it will be an early sign of an impending market top and an upcoming recession.
The specialists are responsible for maintaining orderly markets in the NYSE-listed stocks. They are in the best position to "feel" the supply and demand for the stocks in which they make markets. When the specialists, on balance, show extremely bullish or bearish positions they are generally correct. The members of the NYSE are also privy to good information. This may explain why this group tends to be correct when it is unusually bullish or bearish.
Calculation & Significant Levels
Specialist and Member Short Position: The calculation is the same for both the specialists and the members' short position. The size of the current short position is compared to the average size short position over the last six months. An increase of over 30% is bearish, and a decrease by more than 30% is bullish. The NYSE reports the data weekly with a two week delay, but the indicator is still quite effective.
Formula: (Current short position) - (average short position of last 6 months) ------------------------------------------------------------------- (average short position over last 6 months) Gauge Elements: Magnitude, Time Updated: Weekly (as of Friday close)
Strategy
Two important factors of this indicator should be evaluated. First, specialists are short-term traders. Second, only fluctuations to an extreme are considered significant. When both components (specialist and members) of this indicator have exceeded +30% over their average there has been a tendency for the market to go sideways or down over the following two weeks. On the other hand, when both components indicate short positions are 30% smaller than normal it is a bullish opinion worth respecting for the following two weeks.
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