Transportation Stocks Are Spoiling The Market’s New High Party

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With the DJIA, S&P 500 and Nasdaq indexes making new highs, clearly stocks are enjoying positive market times – right? Well, maybe not. There is an apparent smudge on this happy picture, put there by wrong-way transportation stock performance. (The table below shows the numerous backwards movements in rails, airlines, and other transportation-based stocks.)

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Disclosure: Author holds U.S. growth stocks (including Matson) and cash reserves

While stock market rises often have lagging issues, the transportation sector’s reversal carries meaning beyond simple investor preference. Many investors are looking for well-priced, fundamentally strong, growth stocks, and the table below shows many transportation stocks possess those characteristics – at least on the surface – and yet they have gotten cheaper.

Looking at the relative performance of the Dow Jones Transportation Average makes the weakness clear.
Performance chart courtesy of StockCharts.com

So, what is the problem?

Today’s economy looks healthy, and the shipping/travelling picture is seemingly good, made rosier by the approaching summer months and low energy costs. However, Wall Street focuses about six months out, so the coming fall-winter period is of special interest. What might analysts be seeing? Last week perhaps gave the clue, with numerous articles addressing a weakening economic growth outlook (see previous article, “4 Growing Concerns Now Serious Enough To Cause A Stock Market Correction”). Moreover, the Fed’s coming-soon rate increase and the recent oil price increase has added to uncertainties.

The Dow Theory is worth thinking about
The downward transportation stock performance has brought back discussion of the Dow Theory. (The theory is that both industrial and transportation stocks should exhibit strength in good times and weakness in poor economic periods.) The long uptrends in both stock groups are now at a crossroads. While industrials are continuing to rise, transportation stocks have reversed course.

Performance chart courtesy of StockCharts.com

Thus, from a Dow Theory perspective, the next step is for one sector index to give it up to the other – that is, either the transports reestablish their previous uptrend by making a new high, or the industrials go through downward reversal steps.

The bottom line

The transportation stocks’ poor performance is not necessarily an indication of rough times ahead. However, it does heighten the possibility that the overall stock market, selling at its high, could experience a correction. While investors have been focusing on individual stocks (see “DJIA 30 Stocks’ Behavior Shows Normality, And That’s Good”), a downtrend has a way of coalescing actions through worry.

Therefore, this remains a good time to hold a portfolio allocation in cash reserves for potential future opportunities should a general reversal occur.

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