Janet Yellen has led the Federal Reserve with a steady hand. Even with the goal of winding down the Fed’s balance sheet, her “status quo” on rates stems from her uncertainty about the economy in the coming year. The market tends to run six months ahead. Therefore, the recent heat or solid economic factors such as unemployment and ISM Manufacturing, finally caught up to the new highs in the Dow, S&P 500 and Nasdaq.

However, the sell-off yesterday and particularly the weakness in Transportation, Retail and Small Caps, could be forecasting the next 6 months. How fast can a hot economy become lukewarm? Yellen, our unflappable and experienced economist, departs in February 2018. Jerome Powell replaces her. He is not an economist. Nor, has he presided over any economic crises. Can we see a downturn for two quarters in a row which will bring us to the unthinkable “R” word? Scarier still, is that what follows “R” in the alphabet, is “S”, or the first letter of the word-stagflation. Should an “R” or an “S” occur, would Powell raise rates to counter inflation or lower rates to try (for the 11th year), to spur the economy further? I’m guessing the latter. Now, all of this is pure speculation. However, real signs for concern exist. Transportation (IYT) a big focus, closed in an unconfirmed warning phase. Retail (XRT) broke the 80-month moving average. First time since 2010. The Russell 2000 broke the first line of support at 147. Unless it recaptures it quickly, 144.50-145 is huge. Regional Banks (KRE) had a significant decline as well. Our prodigal has been lavish. That typically leads to its contrition. Circling back to my other focus besides Tran (IYT), is commodities.

Oil digested the move up. Gold Silver, Gold Miners, DBC and DBA all had inside days. Fertile soil in a cemetery attracts hungry Ravens. Likewise, a low volatility, complacent market attracts vultures.

Tomorrow, please join Transportation Live on Facebook at 5 ET. https://www.facebook.com/events/179601429284839/