Photo: screenshot via Vice.com
There’s a classically defined school of investing called Dow Theory says that the Dow Jones Industrial Average and Dow Transportation Average (nicknamed the Trannies) are the only two lines you need to watch to know which way the rest of the market will move. Simply put, these sub-indices should confirm each other’s highs and lows. If one is making a new high, while the other is not doing well, you should be sceptical of the durability of the rally.
However, while most stocks have surged higher lately, transportation stocks have recently collapsed — causing extreme static in the Dow Theory’s buy and sell signals. (Or in Dow Theory speak, a “divergence.”)
That’s bad, Horizon Investment Services CIO Rich Moroney told us by phone.
While this is a worrying sign, it has yet to send an official Dow Theory sell signal.
“What we need to see now is for transports to reconfirm 5368.93 to reconfirm the bullish primary trend,” he told us. “Short of that, there’s going to be uncertainty.”
The Fed’s announcement has done little to move either index, at least so far.
“It was quite interesting to see the reaction to the Fed’s announcement, which was mostly bullish,” he said. “But three profit warnings from transportation firms got in way of that.”
In his note for this week, Moroney said trucker Werner Enterprises warned costs are climbing faster than revenue per mile, while FedEx blamed a slowdown in global trade.
Here’s what the moves looked like:
Photo: Horizon Investment Services
In a follow-up email, Moroney explained why freight and rail have diverted in the fashion shown above:
Airfreight is dominated by UPS and FDX, both of which have been hurt by the slowdown in global trade and price competition from cheaper shipping options. Truckers have a hard time maintaining margins. Until [Norfolk Southern’s] warning this week, rails were seen as better-positioned to maintain margins and sustain at least modest profit growth.
For both the price-weighted Dow Jones Transportation average and capitalisation-weighted indexes of the transportation sector, the rails are the most important sector.
It’s discouraging to see no bounce-back in the rails today.
Moroney says that, all told, transport’s poor profit announcements are unlikely to be contained to their sector.
Why? He notes:
- For the September, December, and March quarters, all 10 sectors of the S&P 500 Index except financials have seen consensus profit estimates reduced since July 1, according to ThomsonReuters.
- Negative earnings preannouncements for the September quarter are outrunning positive preannouncements by a 4-to-1 ratio, the worst showing since 2001.
Ultimately, it’s too early to start freaking out about the transports if you believe in Dow Theory. But it’s something worth monitoring closely.
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