The Dow Jones transportation average — which includes the stocks of 20 airlines, rail operators and delivery companies — offers...
The Dow Jones transportation average — which includes the stocks of 20 airlines, rail operators and delivery companies — offers a preview of where the economy and stock market are headed, according to one school of thought.
These stocks are sensitive to the economy’s fluctuations, so they quickly price in future expectations.
The transports helped lead the market up from 2003 to 2006 and led it down after the average peaked in July. The Standard & Poor’s 500 didn’t peak until October.
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“If we accept the transports as a litmus test of future economic activity, the suggestion is that fears about the depth of an economic pullback have already reached their maximum,” says RBC Capital Markets analyst Ray Hanson.
The transports have also climbed back above their 200-day exponential moving average, which tracks stock-price trend lines.
“I’m not going to put all the cash I have in the market, but it’s a positive sign,” says Richard Moroney, editor of Dow Theory Forecasts. He calls the transports a great indicator for someone who wants to armchair-quarterback the economy.
The transports even topped their high from February, when they had rebounded from a sharp drop-off, another reassuring sign.
To be sure, not all looks rosy for the sector. Gasoline, jet fuel and diesel prices remain high, even with last week’s drop in commodity prices.
FedEx (FDX), one of the Dow transports, said last week a tough U.S. economy likely means only “limited earnings growth” and it cut its profit projection.