Chart of the Week: Transports Leading…

For this week’s chart of the week, I have elected to shine some light on the Dow Jones Transportation Average (DJTA), which is revered by Dow Theory adherents, yet often underappreciated by a larger group of investors.

Since the March 2009 bottom, high relative strength readings in the transports have tended to precede significant bull moves in the broader markets. Rather than spell out how the transports might be a leading market indicator, I have chosen to use the chart below to show the performance of the DJTA over the course of the last thirty years and encourage readers to dig deeper. In my experience, the transports are generally an excellent proxy for the health of broader economy. Given the way the markets have recently reacted to earnings from FedEx (FDX) and have done so similarly for UPS, Union Pacific (UNP), Ryder (R) and others in the past, it appears as if I have a fair amount of company.

For more on related subjects, readers are encouraged to check out:

• Breaking Down the Weakness in Transports
• Chart of the Week: Falling Transports
• The Shift from Roads to Rails
• Watch the Baltic Dry Index in 2009

[source: StockCharts.com]

Disclosure(s): none

Chart of the Week: Falling Transports

For the most part, last week saw some mild negative numbers in most of the major market indices. One particular index that is closely watched by many, however, was particularly hard hit. The Dow Jones Transportation Average (DJTA), an essential component of Dow Theory, fell 5.4% for the week and was particularly hard hit on Friday.

Before the market opened on Friday, two of the three railroads in the DJTA reported earnings and while the bottom line numbers were impressive, investors were spooked by substantial revenue declines. Burlington Northern Santa Fe (BNI) reported a quarterly revenue decline of 27% from the comparable quarter in 2008, while Union Pacific (UNP) reported a 24% drop in revenues for the same period. The weak revenue picture helped to push the DJTA to a loss of 3.5% on Friday and create what looks for now to be a provisional double top in the index in the chart of the week below.

While I am by no means a strict adherent to Dow Theory, I do think the transports are important to watch, particularly when they signal a different economic client than is being reported by the manufacturing sector. The transports will be an important sector to watch going forward.

[source: StockCharts]