Heading back up?

Early February saw the ACT Heavy Equipment Index (HEI) break through the 140 points barrier for the first time since late June last year. The Index had been stagnant around the mid-130s since December, so its recent up-tick is an encouraging sign of growth after a directionless period.

But while the heavy equipment sector had been stagnant for two months, mainstream indicators such as the Dow, NASDAQ and S&P 500 have continued to put on steady week-on-week gains. As a result, the ACT HEI underperformed the wider markets, and even on the longer year-long scale shown by our graph, this usually bullish sector looks weak by comparison.

In the 12 months to the start of February, the ACT HEI gained 9.1%, level pegging with the Dow. However, the same period saw the S&P 500 move up 14.4%, while the NASDAQ led the field with a 17.4% rise.

The heavy equipment market looks set to climb in the near term, although this of course hangs on many of the full-year financials still yet to be published. But while the HEI should improve on its recent lackluster performance, it would take a spectacular rally for it to overtake the mainstream indicators on a 12-month rolling basis.

Having surged in the first five months of last year and fallen sharply in late May, there is a big crest of gains that will gradually move off the left-hand side of our graph as the year progresses. In the coming few months, the HEI will therefore have to perform well just to maintain the similar levels that were seen 9 to 12 months ago.

Implication

It's always risky to translate share price movements to what is happening in the physical equipment market, but the fact that the HEI is now lagging the mainstream indexes implies the scope for profit growth is stronger in the wider markets than it is in the equipment business going forward. This does not necessarily mean the market is due to turn down, but it does imply that investors believe it may have peaked.

Even so, this is a generalization about the heavy equipment market, and the situation seems to be different in the lifting and transportation industry. Lighter areas like home building may be suffering, but if you want to order a new crane today, you'd be lucky to get it before the final quarter of the year and delivery would more likely be in 2008.

It should also be said that investors are not always right! The residential construction market is certainly down off the crest of a wave, but it may be that too much emphasis is being put on this in Wall Street circles. The infrastructure and non-residential construction markets still bullish, and they should at least partially offset the housing decline.

So while things may have peaked, there is no evidence of a serious downturn on the horizon.