By Jim Donnelly, Olson Global Markets
After testing long-term trend line resistance at 6,568, the Dow Jones Transportation Average (DJT) has likely moved into a consolidation phase that appears far from over. With overbought conditions present on both intermediate and long-term charts, the “risk” of more downside price activity appears reasonably high which, in turn portends a broader correction in equity prices.
Although it has not happened yet, a more downbeat stance on the DJT could be confirmed by monthly MACD oscillators (Moving Average Convergence Divergence) soon if transportation stocks edge a bit lower. That could trigger a bearish divergence on monthly bar charts that would likely encourage another round of profit taking.
A set of sluggish retail sales numbers for the month of April, reduced demand for raw materials from China and the ubiquitous worry of a reduction in security purchases by the Fed may have teamed up to cause the initial downturn in the transportation sector. Weakened commodity prices, particularly in lumber, iron ore and copper, underscored the pullback in demand for railroad services.
According to the Association of American Railroads’ rail traffic report, total demand for North American railroad services fell by 1.5% year over year in the first quarter of 2013. An 11% decline in grain volumes coupled with a 7% drop in coal deliveries led the downturn.
On the other hand, a 3.0% increase in international airline passenger demand in April (compared with a 1.4% increase in March) displayed a more upbeat picture that was highlighted by outsized demand for emerging market destinations.
Nevertheless, a further downturn in the Dow Jones Transportation Average would likely be viewed by “Dow Theorists” as a big yellow flag of caution that could spill over into other major market indices in the months ahead. Moreover, a chance to “lock in” profits prior to the end of Q2 on June 30 might result in extended summer vacation time for those who had a bullish conviction at the beginning of the year.