Dow Transports travelling light
Ken Odeluga March 30, 2017 1:21 AM
<p>Although the fundamental underpinnings of equity and fixed income yield reflation have been widely criticised as nebulous, rising demand for transportation and distribution services would indeed go hand in hand with the potential economic boom on which ‘Trumpflation’ is predicated.</p>
If Dow Transports are the canaries in the Trump-trade coal mine, their song may be deceptive right now as they’re outperforming their larger cousins.
There’s some logic to the notion that the Dow Jones Transportation Average’s role of leading indicator will be enhanced whilst the ‘reflation trade’ still has legs. Although the fundamental underpinnings of equity and fixed income yield reflation have been widely criticised as nebulous, rising demand for transportation and distribution services would indeed go hand in hand with the potential economic boom on which ‘Trumpflation’ is predicated. Backing that view, it’s notable that DJTA, the gauge of twenty of America’s largest logistics, railroad, airline and distribution stocks, is having its best week so far this month. It is up some 3% from Monday lows despite trading 40 points lower on the day, as I write. Its more widely followed cousin, the Dow Jones Industrial Average, is up about 1%.
The DJ tag team
Still—the older and broader tenet of Dow Theory—that DJTA must promptly confirm DJIA highs and lows for a prevailing move to be sustained—is intact. The implication right now is that DJTA is going a step further and actually leading the Dow, suggesting DJIA could even extend this week’s rebound. Having found support at previous resistance levels, both DJIA and DJTA steadied earlier in the week, after careering lower last Friday and on Monday, in the wake of the Trump administration’s failed healthcare push. The Dow steadied at levels established in February whilst Transports found a floor at a consolidation zone eked out in mid-November. The supports have proved to be solid nonetheless: so far, so good.
The main cautionary element at play is that Transports are echoing the relatively small cohort of DJIA stocks that powered it to recent milestones. It was CSX Corp, the railroad-to-real-estate giant that accounted for the bulk of DJTA’s Trump-trade gains. CSX rallied 53% between 8th November and 1st March, against DJTA’s 15% rise. And CSX is still 31% higher since January, dwarfing rises of no more than 5% by DJTA/DJIA in the year to date. In theory then, narrow participation leaves Transports just as exposed to risk of a broad pullback as DJIA, particularly with CSX down more than 4% over the last month, and other key components, FedEx and UPS, slipping by similar amounts. With U.S. shares again on a mild retreat as I write, investor caution since last week’s correction remains evident. The continuing recoil of previous leaders does little to encourage the early return of an outright bull case.
DAILY CHART: DOW TRANSPORTATION AVERAGE AND DOW JONES INDUSTRIAL AVERAGE
Source: Thomson Reuters and City Index / Please click image to enlarge
GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.