Wild Ride for Investors in Transports Providing Some Respite

  • Chart watchers see reason for optimism in recent performance
  • Index breaks above key technical levels as pessimism fades

Investors in the U.S. stock market have needed a strong stomach to deal with this year’s ups-and-downs, perhaps nowhere more than the Dow Jones Transportation Average.

The 20-member benchmark has delivered a wild ride in 2016 -- tumbling as much as 12 percent in January before roaring back 22 percent by mid-March. Technical analysts -- chart watchers who have been wary of the group because of lagging performance -- are now easing up on their pessimism. The measure was little changed as of 1:15 p.m. in New York, following a four-day surge of 5.7 percent.

The recent rally has propelled the transports gauge above short- and long-term moving averages that analysts monitor for sentiment shifts. Another nascent bullish sign? In the past 10 days, the gauge outpaced the Dow Jones Industrial Average by the most since February after dipping to a new relative low earlier this year.

“The fact that the transports essentially held that January low and have been bouncing a little is a small, positive sign,” said Jonathan Krinsky, chief market technician at MKM Partners LLC in New York. “I don’t think it’s going to go straight up from here, but it’s improving.”

As in the start of 2016, the group’s been on a short, wild ride in recent weeks -- this time thanks to Brexit. Transports had their worst two-day selloff since 2011 after the secession vote, then surged back 11 percent. While all 20 members of the gauge have rallied in that time, airlines have posted some of the most impressive gains -- American Airlines Group Inc., United Continental Holdings Inc. and Delta Air Lines Inc. are all up at least 19 percent.

The strength of airline stocks has been accompanied by easing oil prices and better economic data, according to Dave Lutz, the head of ETF trading for JonesTrading Institutional Services. American Airlines extended its gains on Tuesday, leading other transport shares higher with an 11 percent surge, after the carrier announced credit-card deals will boost its income.

“We might have some mutual funds nibbling in the space again, but I don’t think they’re going all-in yet,” Lutz said from Annapolis, Maryland.

Short-sellers are also retreating. Bearish wagers as a percent of shares outstanding for the iShares Transportation Average ETF has fallen to 7.2 from 11.2 in May, when it was the highest since August 2012, data compiled by Markit Ltd. show.

It’s hard to be euphoric about transport stocks, even with their rebound, Krinsky said. While the S&P 500 Index and Dow average set new records Tuesday, the transports benchmark is still almost 15 percent off its December 2014 all-time high.

The group’s sluggish performance isn’t unprecedented. It’s reminiscent of 1994-1995, when transports struggled even as the S&P 500 hit a peak in February 1995, according to Krinsky’s research. While he’s turned bullish on U.S. equities broadly, he’ll be looking for signs that the worst of the turbulence in transports is over -- namely that the 20-, 50- and 200-day moving averages are moving higher, as they’ve started to do in recent days.

“The long-term outlook is still slightly bearish-to-neutral but it’s definitely improving,” Krinsky said.

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