Is The Stock Market Wrong? (SPX)

We all know the stock market can be irrational. It can be brazenly optimistic such as Nasdaq 5,000; and it can be completely despondent like last year's Dow 6,550.

So, with the S&P 500 (SPX) falling 14% since it's April peak, is the stock market acting irrationally once again? A little-noticed indicator that taps directly into the movement of freight contrasts to the horrendous performance of the stock market recently.

The Ceridian-UCLA Pulse of Commerce Index jumped 3.1% in May. This was the largest monthly increase since February 1999. So, what is this index? It tracks credit-card purchases of diesel fuel at truck stops across the country, thus providing a real-time indicator of how much freight is moving from ports and factories to consumers.

The jump in the PCI index correlates with other indices like the PMI and ISM which have shown steady increases from 2009 lows.

Unemployment, however, remains the laggard.

Economist Edward Leamer of UCLA says the markets, and investors in particular, are dealing with the fear effects of 2008, thus preventing them from buying stocks for fear of another collapse.

Bloomberg News reported this week that rail shipments of waste freight rose 45% in April and May, the highest increase since 1994. Bloomberg claims the shipments of junk, especially scrap iron and steel, have a 0.82 correlation to year-over-year changes in GDP.

Leamer also adds that many investors fear a double-dip recession, as European debt problems and huge U.S. budget deficits sap growth. But Leamer says that another recession would require a $100 billion decline in spending next quarter. No sectors of the economy are clearly positioned to take such a hit he says. Leamer believes the rising truck traffic indicates GDP growth of 3-5% in the second quarter.