TRANSPORTS BENEFIT FROM OIL SLIDE -- LEADERS ARE CNF, EXPD, AND LUV

TRANSPORTS ARE SHOWING RESILIENCY... Earlier in the week I wrote that falling energy prices should benefit certain market groups more than others. I also suggested that any fourth quarter rally would most likely be led by financials (mainly banks), retailers, technology, and transports. I've already shown some early signs of rotation into the first three groups. That leaves the transportation group which normally suffers when fuel prices rise and prospers when fuel prices fall. With energy prices on the defensive over the last month, it's not too surprising to see the transports showing decent relative strength. The top line in the bottom of Chart 1 is a relative strength ratio of the Dow Transports divided by the S&P 500. The bottom line is the price of crude oil. Notice that the ratio started to rise in early September right after crude prices started to drop. That suggests to me that there's a connection between the two. The most obvious connection is with the airlines. Chart 2 shows that the Airline Index started to do better than the S&P in mid-September as oil was dropping. Several transportation stocks qualify as group leaders.

Chart 1

Chart 2

TRANSPORTATION LEADERS ... The three transportation stocks shown below combine good relative strength and strong chart patterns. The charts speak for themselves. The October surge in CNF has put it close to a new 52-week high. EXPD is close to challenging its 2005 highs. Chart 5 shows Southwest Airlines having broken through its spring 2005 highs. Its rising relative strength line (measured against the transportation average) shows LUV to be a leader in that group. Notice that the new LUV leadership started right around the time that oil prices peaked in early September. That shows how a transportation stock can benefit from falling energy prices.

Chart 3

Chart 4

Chart 5

TRANSPORTATION ISHARES ... Whenever I write on a particular group, I'm asked if there is a corresponding Exchange Traded Fund. The transportation group is represented by the iShares DJTA Index (IYT) shown in Chart 6. It looks similar to the Dow Jones Transportation Index on which its based. And like the DJTA, the relative strength ratio of the IYT has turned up since September. The IYT has an 88% weight in industrial transportation stocks and a relatively small airline weighting of 8%. Its two biggest holdings are FedEx and UPS both of which are trading over their 200-day moving averages. I suggested earlier in the week that if the market is going to benefit from weaker energy prices and attempt a fourth quarter rally, this is one area that it's likely to start.

Chart 6

Chart 7

Chart 8