Investigating the Recent Dow Transports Weakness
It's hard to find a risk-on equity asset class that hasn't bounced since the Dec 24th low but that's old news.. What should intrigue investors is the recent weakness in the Dow Jones Transportation Average, including a 9-day losing streak and a lack of discussion about it. Frank Cappelleri, Executive Director at Instinet, provided data and charts to clients in a note on Tuesday afternoon.
Frank states "this would be the 10th losing streak of at least eight days since 1990." With only a -2.5% decline, the past eight days have been the most shallow decline since 1990. The largest eight-day decline since 1990? -28.2% occurring in September 2001. So what does that spell for the future? We can take a long-term look at the Dow Transportation Average following other eight-day declines below:
As of today's close and another decline, Frank adds:
So should investors be concerned? Possibly.. The Dow Transports have given back their recent alpha. In mid-to-late February, the Transports were up 23.2%, with the Dow Industrial up 19.0% and the S&P 500 up 18.4%. As of March 6th, these three indexes performance are about equal. Transports are up 19.1% with the S&P 500 up 18.4% and the Dow Industrial up 18.2%. You can see this in the graphic below:
Now let's take a deeper dive into the index. Luckily for investors the Dow Jones Transportation Index is only 20 components so we can easily and quickly get a big picture feel on where the index may head next. The index is also a price-weighted index. A price-weighted index is an index where each stock influences the index in proportion to it's price per share, meaning higher priced stocks have a higher influence on the index's direction.
Starting out weekly basis, the Transports bounced at key support in December 2018 around the $160 - 165 area. In prior instances, the Transports have been the first group to lead to the upside or downside so the bounce was a bullish sign back in December. On the contrary, price has not been able to get above the November 2018 highs now creating 3 lower-highs. This is typically not a characteristic of an uptrend.
The top 5 largest components in the Transports are: Norfolk Southern (NSC), FedEx (FDX), Union Pacific (UNP), Kansas City Southern (KSU), and United Parcel Service (UPS). Of these five stocks, three are Railroad stocks, which is the strongest sub-sector transportation. The Dow Jones Railroad Index relative to the Dow Jones Transportation Average has been continually making new all-time-highs since early 2018. The strength of this group is very bullish.
The second largest component, FedEx, is at a very important level from a long-term perspective. FedEx is currently trading below the prior resistance-turned-support area of $178 - 182. FedEx rolling over could be a catalyst for more Transports trouble..
The weakest area of the Transports continues to be the Airlines. Airline weakness is not new and has been the case for the past few years now. Stocks like American Airlines (AAL) and JetBlue (JBLU) are in downtrends while United Continental (UAL), Southwest Airlines (LUV) and Delta (DAL) are basing. These five stocks are all components of the Dow Transports. Taking a look at the Dow Jones Airline Index relative to the Dow Jones Transportation Average, we have been trading sideways but are potentially flirting with a dangerous level. A rollover here would not help the index but it is important to note that due to the price-weighted index, airlines are currently the least influential.
On a monthly chart, the Dow Jones Transportation Average relative to the Dow Jones Industrial Average is at key support dating back to November 2007 within a larger consolidation. From a risk-on perspective, investors want to see the Transports head higher, not lower, relative to the Industrials.
In conclusion, we have areas of strength and areas of weakness within the Transports. The areas of strength have more influence on the index at the moment. Considering other indexes like the S&P 500, the S&P Midcap 400, the Russell 2000 and the Russell Microcap's are seeing some weakness at the October - November highs, it wouldn't be surprising to see weakness continue in the Dow Transports as they have led the short-term downside. With a further pullback comes the opportunity for a potential head-and-shoulders pattern on the daily chart. Investors should keep an eye on this possible bullish development.
Thanks for reading!