Dow Transports In Play
Principles of the Stock Market

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Have You Seen This?

Have You Seen This?

More Bulls Surfacing on the Dow Transports.  Written Wednesday am, April 2nd, 2008.

 

Regular readers may remember last Wednesday I wrote I was bullishly impressed with the recent performance of the Dow Transports, that by breaking three downtrend lines drawn off last July’s top, this index had turned bullish ala the Fan Principle.  (You might want to review that column again.)  Anyway, yesterday I read a couple of other bullish articles on www.MarketWatch.com about these very same “trannies.”   
  • One was by a technician, Michael Ashbaugh, who said that the truckers, a subsector of the transports, were looking good, and posted bullish looking charts of Old Dominion Freight Line (ODFL), Arkansas Best (ABFS), Con-Way Inc. (CNW) and Landstar System (LSTR).  He goes on to write that “…the transports are among the first beneficiaries of an economic pick up.”  Then he says “… the railroads also came to life during March.”  And mentions three rails, Burlington Northern Santa Fe (BNI), Genesee & Wyoming (GWR) and CSX Corp (CSX).  Schwartz View:  Eagle-eyed readers of my letter may remember that back last Tuesday I noted that two rails had made it as ‘new names’ onto the IBD 100 list of leading companies; CSX and Kansas City Southern (KSU).
  • The other article was by Mark Hulbert who publishes a service which tracks stock market letters like mine.  He doesn’t do much recommending, more just passing along insights he notes offered up by the letter writers.  Anyway, the points Mr. Hulbert illuminates were:  (1) that the Dow Transports actually rose in the first quarter of 2008, +4.7%, while most all other stock indices were down and (2) that by Dow Theory this transports strength pointed out a divergence between the Dow Industrials and Dow Transports and sets up a possible Dow Theory buy signal.  Schwartz View:  Hulbert spoke with three Dow Theory newsletter editors and was told that they are waiting for joint confirmation before they predict anything, up or down.
Schwartz View:  Although I’m bullish on the Dow Transports, I have a different spin than both authors mentioned above.  First I don’t see us as in the early stages of an economic pickup, the reason Michael Ashbaugh infers the transports strength to.  I figure the reason transports are doing well is because the US farming industry is going great guns and because US exports are booming as other countries are buying our products because of the very weak and depressed US dollar.  Thus the transports are acting like a late cycle industry, not an early cycle sector.  And that when the built up, well established momentum wanes overseas as their economies slow and commodities sell off and the US dollar reverses upward, the trannies will turn down.  Second, I also take issue with Mark Hulbert that this divergence between the Dow Industrials and Dow Transports is a bullish signal and puts us on watch for a change of trend, upward.  My studies of Dow Theory advises not to begin to jump ship when a divergence between the two averages occur.  That it’s more likely the divergence will clear up in favor of the already established trend, which today is down.  No, I think that during a forthcoming substantial rally – cross our fingers! – that the transports will do well, likely spurred onward and upward by lower oil prices which should fall in any commodity pullback.  But that this transports strength is still only temporary, say a play on the depressed US dollar now which could be reversing even as I write and thus with a lag, the strength in transports may end as well.  So I look at the transport strength as a trade (days to weeks) or a speculation (weeks to months time frame) rather than an investment (months to years).  Unless you’re a Warren Buffett who can hold forever. Disclaimer!  I’m playing the transports with small positions in IYT (iShares Dow Transport) and FSRFX (Fidelity Select Transports) and RYPIX (Rydex Transportation Fund) although I can buy more or sell at anytime as things change. 

 





Posted 04-03-2008 8:54 AM by Richard Schwartz