Stall In Transports Worrisome


If not for the stubborn refusal of the Dow Transports to confirm recent new highs in the Dow Industrials, stock-market technicians would have few reasons for complaint.

Nearly all the major averages have broken out, with indexes and advance-decline lines for stocks of all sizes reaching new highs. The number of stocks at 52-week highs continues to handily exceed the number at 52-week lows, and such typically bull-market sectors as technology, industrials, and consumer cyclicals have displayed much-improved price action since Jan. 30.

Given that backdrop, it's worth asking whether the price-weighted Dow Transports — with 20 mostly airline, airfreight, railroad, shipping, and trucking stocks — are sending a misleading signal.

The evidence suggests not. Broader, capitalization-weighted indexes of the transportation sector have performed in line with the Dow Transports, reaching new highs in late 2014 before stalling this year. Also, all the major transportation-related industry groups have similarly stalled.

The Morgan Stanley Cyclical Index and other barometers of economically sensitive stocks have reached new highs, helped by strength in materials and consumer cyclicals. But the Dow Transports have been dogged by some questions crucial for the transportation sector, including:

• Is industrial America still on a rebound path, even with a sharply higher dollar hurting exports and spending cuts hitting the energy sector? Shares of railroads (26% of the Dow Transports) and truckers (20%) are highly sensitive to expectations for the U.S. industrial sector.

• Will this time really be different for the airlines (17%), which have a history of cutthroat price competition? So far, U.S. airlines are pocketing most of their fuel savings, but investors are worried the good times will end sooner rather than later.

• How much will slowing global demand crimp U.S. consumers and U.S. companies? Few companies are more sensitive to end-market demand and global trade than airfreight providers (28%).


With a close above the Transports' all-time high of 9,217.44, the bullish primary trend would be reconfirmed under the Dow Theory. Without new highs in the Transports, a pullback below the Jan. 30 closing lows of 17,164.95 in the Industrials and 8,649.32 in the Transports would represent a bear-market signal. For now, we're holding about 85% of our buy lists in stocks.

Transportation-related stocks earn generally high marks in our Quadrix rating system. Alaska Air ($66; ALK) and railroad Union Pacific ($118; UNP) are Focus List Buys and Long-Term Buys, while Southwest Airlines ($44; LUV) is a Long-Term Buy.

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