U-Turn in Transport Stocks Signals Recession Angst Overdoneby
Group leading rally after bottoming 3 weeks before S&P 500
Short interest, trading volume show lingering pessimism
As the Standard & Poor’s 500 Index careened to a 22-month low in February amid rising recession angst, one corner of the market was flashing tepid signs of optimism. A month later, the same stocks may be signaling more gains ahead.
Truckers, rail operators and airlines -- the groups represented in the Dow Jones Transportation Average -- have done a U-turn since slumping to a two-year low on Jan. 20, three weeks before broader market indexes bottomed. They’ve outpaced the Standard & Poor’s 500 Index by 6.6 percentage points since then, maintaining their lead during a rally that’s restored more than $1.5 trillion to U.S. equities since Feb. 11.
For David Joy, chief market strategist at Ameriprise Financial Inc., which oversees $766 billion, the early rally in transportation stocks validated the group’s reputation as a leading indicator of economic strength. Data since the industry bottomed has reduced recession anxiety, with reports showing a surge in hiring, a respite from manufacturing weakness and continued strength in the American consumer.
“There was clearly a signal in transports that may not have been so apparent if you weren’t paying attention,” Joy said. “They’re obviously a high-beta sector and general proxy for overall economic activity. The fact that the group is attracting some interest is also an important signal, at least temporarily.”
The Dow transports have rallied almost 14 percent since plunging to the lowest level since 2013 in January. Only one of the index’s 20 members has retreated since then, with Kansas City Southern’s 30 percent rally leading gains among railroad operators. Surges of more than 25 percent in United Continental Holdings Inc. and Ryder System Inc. have led airlines and truckers higher. Shares in the average rose 0.7 percent to close at 7,528.44 on Wednesday, near the highest level of the year.
The Dow transportation gauge decreased 0.9 percent at 11:32 a.m. in New York.
Investors watch transportation shares because the market behavior of truckers and shippers tends to provide clues about the economy itself, since those industries form the infrastructure over which goods and services travel.
The group was among the most beaten-down in 2015, falling 18 percent compared with a 0.7 percent slide for the S&P 500, as mounting concern that the industrial part of the economy was in recession showed up in the shares of companies from CSX Corp. to FedEx Corp.
Recent data from durable goods orders and industrial production don’t point to a recession in this part of the economy, according to Tobias Levkovich, Citigroup Inc.’s chief U.S. equity strategist.
“The data is not supportive of that argument,” he said Wednesday on Bloomberg Television. “Most of the data is actually pretty supportive that this is just an inventory correction.”
There’s still lingering pessimism about these stocks after last year’s rout, said Eric Marshall, president of Hodges Capital Management Inc., which oversees about $3 billion in assets. “They were oversold -- you had a pretty substantial economic slowdown factored into the numbers,” he said.
Bearish bets on the exchanged-traded fund tracking the Dow transports group last month jumped to the highest since January 2014, and short interest as a percentage of shares outstanding -- currently at 5.8 percent -- sits at more than twice its two-year average.
The transports have given false signals before. The group rallied 11 percent from an August low to late November, about on par with the S&P 500’s gain, only to plunge below the summer trough in mid-December. Meanwhile, trading volume in the post-Jan. 20 rally is down about 4.1 percent from the beginning of the year, according to data compiled by Bloomberg.
Still, the strength of the recent rally has some chart watchers on alert for a possible indicator further gains lie ahead. Strategists who subscribe to the Dow Theory will need to see another steep rally, though, as the century-old strategy sends a buy signal when both the industrial and transport indexes rise above previous highs.
For both Marshall and Joy, their focus remains on fundamentals when making investment decisions, making the Dow Theory less prescriptive. They’re encouraged by the leadership coming from the transportation group, but caution that its diverse nature, from road to rails and the sky, makes it difficult to view these stocks as a monolith.
“It’s important to understand what’s going on in transports as a potentially meaningful signal on the economy,” Joy said. “But they can send misleading signals, so it’s not a religion.”