Dow Transports Flash Same Bear Signal They Sent in August

  • The 20-company equity index slumps to the lowest in 20 months
  • Seventeen members of the gauge have fallen since late November

If train and airplane companies are indeed the stock market’s early warning system, it could be time to worry.

After rallying 11 percent from an August low to late November, the Dow Jones Transportation Average yesterday dipped below its summer trough, slumping toward a second correction in four months. All but three companies in the gauge have declined since Nov. 20, with railroad operator Kansas City Southern and tank barge operator Kirby Corp. trading at levels last seen in 2012.

Weakness in transports is relevant to investors who adhere to Dow Theory, which prescribes a sell signal when both the industrial and transport indexes fall below the low of a previous retreat. It’s also bothersome to a larger group of analysts who believe the market behavior of truckers and shippers provides clues about the economy itself, since those industries form the infrastructure over which goods and services travel.

“Transports, to me, is the fresh misery today because the move is just god-awfully ugly,” Michael Antonelli, an institutional equity sales trader and managing director at Robert W. Baird & Co. in Milwaukee, said Monday by phone. “Most people thought transports had broken their downtrend back in November. Now they’re plumbing new lows.”

Shares in the average rose 0.8 percent to 7,548 as of 9:44 a.m. in New York, more than erasing yesterday’s 0.5 percent decline. The index, which also includes FedEx Corp. and Alaska Air Group Inc., has declined more than 700 points since Nov. 20, falling 11 of 16 trading days and touching the lowest level since April 2014 yesterday. It’s trading about 0.8 percent above the August low, while the Dow Jones Industrial Average is trading about 12 percent above its summer nadir.

What a difference three weeks can make. On Nov. 20, the transportation average flirted with rising through its 200-day moving average, trading within 60 basis points of the technical threshold last penetrated in May. The reversal that now has the gauge threatening a long-term low has particular significance for technicians.

“This is a very important support level,” said Matt Maley, an equity strategist at Miller Tabak & Co LLC in New York. “When the broader stock market was range-bound, transports started going down. This could be an indicator that could lead the broader market lower.”

The selloff is symptomatic of a market that’s on hold until the Federal Reserve meets later this week and the calendar year ends. “I don’t think that people are worried that this is a fresh crisis,” Antonelli said. “When you get down to the end of the year, you just have lot of people who aren’t participating in the market and that’s magnifying the problem.”

Bearish sentiment on transportation stocks has risen since late November, but is only slightly above its year-to-date average and well below the end of October when it was at a 22-month high. Short interest as a percentage of shares outstanding for the iShares Transportation Average ETF sits at 3.7 percent, according to data compiled by Bloomberg and Markit Ltd. That compares with an average of 2.3 percent since Dec. 31.

Even as transportation stocks have been “quite negative” since failing to trade above the 200-day moving average last month, the weakness makes sense because “oil’s been clobbered,” Maley said. West Texas Intermediate crude has fallen about 8 percent since Nov. 20 and on Monday dipped below $35 a barrel for the first time since February 2009.

As a result, any relief in oil prices could buoy transportation stocks. “If we can get a bounce in crude oil from its oversold level, that’s going to help the rest of the market, as well,” Maley said. 

What’s more, investors should exercise caution in anticipating further weakness ahead just because transportation stocks have tested the August low -- rather, await a “meaningful, lower low,” he said.

“Near-term, you never want to jump the gun when you get down to support levels because things can rip right back up very quickly,” Maley said. “If it does hold, it could give us a decent opportunity to rally.”

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