Transports Head South

6/1/2015


The Dow Industrials and S&P 500 Index have been unable to build on the new highs reached in mid-May, while the Dow Transports have reached fresh seven-month lows amid weakness in airline, railroad, and trucking stocks.

For now, our three-part advice is unchanged: Subscribers should watch the averages, hold some extra cash on the sidelines, and look for opportunities one stock at a time. Our Long-Term Buy List has 82.4% in stocks, versus 84.8% for our Buy and Focus lists.

Transportation breakdown

While the Dow Transports have been unable to reach new highs since December, it took last month's breakdown for the average to attract widespread attention. Within days of new highs in the Dow Industrials and S&P 500, the Transports slumped to seven-month lows as airline stocks tumbled. Discouragingly, the railroad and trucking groups also reached fresh lows, heightening worries regarding the U.S. economy.

Historically, extended periods of weakness in the economically sensitive Transports have signaled an increased risk of a recession. Even when recession has been avoided, it is tough to make money in the U.S. stock market when its most cyclical components are deteriorating.

Still, this year's slump in the Transports should be kept in perspective. The Transports have outperformed handily in this bull market — and still trade within 10% of all-time highs. Even after this year's decline, the Transports have rallied 294% from the bear-market low in March 2009, compared to 214% for the S&P 500 and 177% for the Dow Industrials.

Also, by itself, the breakdown in the Transports does not signal an imminent bear market. For a change in the primary trend to the downside, the Dow Theory requires that both the Industrials and Transports reach significant lows. The Transports have hit significant lows, but the Industrials would need to close below 17,164.95 for a bear-market signal.

Conclusion

While the breakdown in the Transports is discouraging, moving to cash aggressively seems premature at this point. With a breakdown below 17,164.95 in the Industrials, we will raise more cash. With a rebound above the all-time high of 9,217.44 in the Transports, we will cut our cash position.

For now, with the broad market trading close to its highs and our growth-at-a-good-price approach still working nicely, we are holding 82% to 85% of our buy lists in stocks. For new buying, especially promising picks include Jones Lang LaSalle ($174; JLL) and Magna International ($58; MGA).


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