Averages Approach 2012 Highs

6/25/2012


Bargain-hunting and expectations of continued support from the Federal Reserve have extended the rebound from the June 4 lows, with the Dow Transports showing particular strength. With near-term action likely to hinge on news regarding the global economy and the European debt crisis, we are taking a wait-and-see posture, holding about 10% to 15% cash positions while looking for opportunities one stock at a time.

Solid shipment volumes

From the closing lows reached June 4, the Dow Industrials have rallied 6% while the Dow Transports have gained nearly 8%. The extent of the rebounds has removed any doubt regarding the significance of the June 4 lows, so a breakdown below 12,101.46 on the Industrials and 4,847.73 on the Transports would represent a bear-market signal under the Dow Theory.

The rally has also put this year's closing highs within striking distance. The Transports are just 3% below the Feb. 3 high of 5,368.93, while the Industrials are within 4% of their May 1 high of 13,279.32. With closes in both averages above those levels, the primary bullish trend would be reconfirmed — and the June 4 lows would no longer be significant.

Amid downbeat economic news, the bounce in the economically sensitive Transports has attracted notice, with some dismissing the rebound as a short-lived trading anomaly. But broader indexes of U.S. transportation stocks have shown similar strength, with nearly all transport-related groups participating.

Trucking and railroad names have led the rebound, helped by solid shipment data. In May, for-hire truck tonnage was 4.1% higher than the year-earlier period, the 30th consecutive month of growth, according to the American Trucking Associations. Through June 9, year-to-date railroad carloads were up a mere 0.7%, partly because of a 10.2% decline in coal shipments. But total carloads excluding coal were up 3.6%.

More important, profit expectations for transportation companies are holding up. Over the past 60 days, current-year consensus profit estimates have increased for 15 of the 20 members of the Dow Transports. Anecdotal evidence from transportation companies suggests U.S. demand remains firm, if not robust.

Conclusion

The strength in the Transports is encouraging. But the Transports need to surpass 5,368.93 to demonstrate they are truly trending higher, and a new high in the Transports will not have much significance under the Dow Theory unless the Industrials close above 13,279.32. For now, subscribers should watch the averages and hold about 10% to 15% of equity portfolios in a short-term bond fund.


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