The major indexes are sitting, apparently comfortably, just
below highs not seen in over 4 years, since before the market
meltdown of 2008.
But one sector index has some investors and traders worried: the
Dow Jones Transportation Average (DJTA). Proponents of "Dow Theory"
believe that bull markets are confirmed by the "Transports" showing
strength at the same time as the Industrials, for reasons
concerning both economic fundamentals and technical price analysis.
Below is a chart showing this weakness.
Dow Theorists say this is a dire warning and can cite "numerous
times over the past 5 years where Dow Theory Non-Confirmations
showed us that the market was in a danger zone of topping," says
Chad Karnes writing for ETF Guide. "Every single time this signal
occurred the broader market soon fell."
Given this concern, it's a good idea to take a look at the
"trannies" in terms of the economy and price. Below is a list of
the top holdings of an ETF which tracks the DJTA, iShares IYT. The
DJTA index includes 20 companies, but as you can see, these top ten
make up nearly 70% of the weighting.
It's probably not hard to guess who has been dragging on the
Transports: the air-freight shippers like UPS and FedEx, who
combined comprise 16% of the index, and the airlines which make up
only 11% in total.
United Parcel Service
) both have given subdued outlooks this year about their business,
domestic and global.
But there is also some underlying strength which must be looked at
before one rushes out (or to their PC, rather) to sell stocks.
Railroad businesses and trucking companies have been doing well and
this is showing up in the Zacks Rank. With rising revenues and
profits, earnings surprises, and the consequent earnings estimate
revisions (EER, the bread and butter of the Zacks Rank), these
industries seem to speak of healthy economic activity which has
only been somewhat reflected in equity prices.
Below is a table with a focus on companies involved with rail
transport. I've included UPS and FDX as well to highlight the
importance of the Zacks Industry Rank.
With over 260 separate industries in the Zacks classification
universe, the cumulative Rank of stocks within each group create a
very handy aggregate ranking of industry performance. Generally,
industry groups in the upper third signify healthy growth.
One thing to note regarding price is that
) are 20% of the DJTA and these stocks have done well since the
June lows. If it weren't for them, the Transport Index would be
stuck in a very low gear.
Will the Transports find their footing and rally with the Dow? Or
are they a harbinger of a broad market decline around the bend?
Regardless of the indicator value of the Transports, it pays to
look at some of the industries and stocks doing well within it
anyway. Rails seem to be signaling something positive about the
economy that isn't always obvious. It could be energy related, or
it could be rail improvement projects, or both.
The next step in finding out should be looking at the Zacks company
reports and earnings estimate trends for the 3 equipment and
leasing companies in particular,
American Railcar Industries
Kevin Cook is a Senior Stock Strategist with
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