Over 100 years ago, Charles Dow noticed that a decrease in the fortunes of transportation companies potentially presaged trouble in the broader economy. Investors may do well to heed this warning nowadays. The market's sharp selloff after returning from the Memorial Day break might not amount to much in the long run, but if transportation stocks are any kind of bellwether, then investors should pay close attention to this new risk factor. It may be flashing an early warning.
During the month of May so far broader indexes have been treading water, but transportation stocks have fallen by 5% and broken down through levels of previous technical support. The Dow Jones Industrial Average and the S&P 500 were off roughly one percent to begin the week, while the Proshares ETF which tracks the transportation industry (ticker symbol IYT) was off a more aggressive 1.6% for the day.
A comparison of how stocks have fared so far this year is even more telling. Shares of freight and logistics companies show mixed results. Among these stocks Fedex (FDX) shows strength, but this stock is still underperforming the S&P 500 year to date. In rail companies more weakness shows. Industry heavyweight Union Pacific is off 13% for the year, with other companies showing variations on the theme.
Airline stocks would seem to have a bright spot in Jet Blue (JBLU) which is still up nearly 30% for the year; however, just in the past week the stock has shed 20% from its highs. Delta Air lines (DAL) is off by 14% for the year. The rest of the industry has seen declines accelerate over the last quarter as oil prices and slackening travel-season demand have conspired to push share prices into a downward trend.
In his book, Encyclopedia of Technical Market Indicators, Robert Colby, CMT, shows that Dow Theory signals tend to lead the markets lower over the subsequent year on better than two out of three occurrences so it pays to take notice when one occurs. These signals begin with a selloff in the transportation sector. The current conditions have not yet produced such a signal but with the transportation index in such a retreat it becomes matter of concern.
What must happen next is that Dow Jones Industrial Average must fall lower than its January lows around 17,150. That would amount to approximately a 5% decline from current prices now. Not unattainable but less likely to happen within the next two months given the market’s current pace. Even so investors and market watchers alike should pay attention to this signal and accept an elevated risk of trend change in the upcoming quarter.
