Getting Technical
As Transport Stocks Flail, Broad Market May Suffer
Even as oil plummets, transport is in decline. That’s a bad sign for the economy and stocks.
By Michael Kahn
But that is not happening. Stocks ranging from Norfolk Southern to FedEx have been weak, which tells us something important – and unpleasant – about the market and the economy.
The Dow Jones Transportation Average began its decline in March, and in May became the first major index to suffer a moving-average death cross (see Chart 1). Rather than give us a trading signal, the dip of the 50-day moving average below the 200-day average told us that the bears were already in charge here. And with the index still trading below both of those averages, they still are in charge.
Chart 1
Dow Jones Transportation Average
A lower low and lower high is the basic definition of a bearish trend. And combined with the October 2014 selloff we can see a possible head-and-shoulders pattern nearing completion (see Chart 2). The neckline, or support, for the pattern would be in the 7350 area, somewhat below the August low. The index closed at 7627 Wednesday.
Chart 2
Dow Jones Transportation AverageCompare the transports with the Dow Jones Industrial Average, which is down less than 2% over the same span.
To be sure, different groups within the transportation sector reacted differently. Airlines, for example, did not break down, and even set a nine-month high earlier this week. Lower fuel costs did indeed help their performance, at least until Southwest Airlines and others spoiled the party with lowered outlooks.
Why the cautious forecast? That is not for a technical analysis column to determine, but I can suggest two possible explanations. The first is terrorism fears and the second is simple declining business profits on lower customer activity.
Trucking presents a different look as its subindex has dipped below its August low. Given lower fuel costs this is a surprise, so it suggests the economy is not as strong as it might appear in recent government data. Again, that is beyond the scope of this column, but the fact that truckers – the key movers of domestic goods – are leading to the downside should make general stock market performance suspect, too.
On the charts, the Dow Jones U.S. trucking index did complete, and break down from, a 19-month long head-and-shoulders topping pattern.
Railroad stocks do not have the same head-and-shoulders pattern as other groups, but the sector index also moved below its August low. It is understandable that rails have been the weakest transport groups because they move coal and other fuels. And we can make a similar case for marine transportation stocks, which include oil tankers.
That leaves air freight. The technical patterns are unremarkable here compared with the other groups’, but bellwether FedEx did break down from its September-November rally. And according to the on-balance volume technical indicator, money flowing back into the stock peaked in early October, well before price peaked, and it has been falling ever since.
On-balance volume keeps a running tab of trading volume on up days minus volume on down days. The theory is that it tells us who is more aggressive, bulls or bears. Money then follows the winner, either in or out of the stock.
The bottom line is that the transportation sector is not faring well, which could be a reaction to world events or could be an early warning of pending economic problems. Add this to the growing list of worries about the market, and realize that sooner or later this could create a proverbial “wall of worry” that is too big to climb.
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