TRANSPORTS TEST LONG-TERM SUPPORT LINES -- AIRLINES AND TRUCKERS ATTRACT SOME BUYING -- TRANSPORTATION/UTILITY RATIO IS OVERSOLD -- SO IS THE TRANSPORTATION/INDUSTRIAL RATIO -- THE DOW USUALLY HOLDS UP BETTER IN A WEAK MARKET
TRANSPORTS START TO SHOW SOME BOUNCE... Transportation stocks have been one of the weakest parts of the stock market over the last year. In fact, the downtrend in that economically-sensitive group was cited several times last year as a negative warning for the economy and stock market. The daily bars in Chart 1 show the Dow Jones Transportation Average experiencing a modest bounce over the last month, while the rest of the market was falling. That helped push the Dow Transport/Dow Industrial ratio (top of chart) higher for the first time in awhile. Its daily MACD lines (below chart) have also turned positive. While that may be mildly encouraging, it might be more instructive to see where the TRAN stands on a longer-term basis.
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Chart 1
TRANSPORTATION AVERAGE IN OVERSOLD CONDITION... The weekly bars in Chart 2 show that the Dow Transports have lost roughly a third of their value over the last year. The green Fibonacci lines, however, show that they have also retraced 50% of their 2011/2014 rally which puts them in a potential support zone. In addition, the 14-week RSI (top of chart) has reached oversold territory at 30 for the first time since 2011. That two factors combined suggest that the beaten down transports may have reached a potential support zone where they could start to stabilize. There's more.
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Chart 2
TRANSPORTS TEST LONG-TERM SUPPORT LINE... The monthly bars in Chart 3 show that the Dow Transports have also retraced 38% of their major uptrend starting in the spring of 2009. In addition, the TRAN is testing a major support line drawn under its 2009/2011. There again, Chart 3 suggests that this unloved group may have finally reached a potential support area. That causes me to pay a bit more attention to its recent rally attempt.
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Chart 3
AIRLINES HOLD 2015 SUPPORT... The airline group has the strongest chart pattern in the transportation group. The daily bars in Chart 4 show the Dow Jones Airlines Index holding chart support formed in the middle of 2015. Airlines are the strongest part of the Dow Transports today. Obviously, the group needs to see more upside movement to call the recent test of support successful. One would think that airlines would be getting more support from falling crude prices.
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Chart 4
TRUCKERS REBOUND... Truckers have been the strongest part of the transportation group over the last month. That can be seen by the rebound in the Dow Jones US Trucking Index in Chart 5. In fact, that index is now testing its 200-day average and a resistance line drawn over its 2015 highs. Truckers should also benefit from falling fuel prices. Rails have been held back by slowing energy traffic, and coal in particular, but are also rebounding. In the delivery service category, UPS has also experienced a nice rebound. The transportation group still has a long way to go to signal that it has reached a bottom. Since that's where early signs of a market downturn started last year, however, the transports would be a logical spot to look for some sign of improvement when the stock market finally bottoms.
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Chart 5
TRANSPORTATION/UTILITY RATIO IS OVERSOLD... Chart 6 plots a ratio of the Dow Transports divided by the Dow Utilities. The ratio peaked in early 2015 and has since fallen to the lowest level in three years. Its collapse since the start of 2016 was a combination of a 6% drop in the transports and an 8% jump in utility prices. The jump in utilities was the result of a flight to safety into dividend-paying stocks. A falling ratio is usually a sign of weakess for stocks and the economy. It may be worth noting, however, that the TRAN/UTIL ratio is nearing potential chart support along its 2012 low. In addition, its 14-week RSI line (top of chart) is the most oversold (below 30) since its 2011 bottom. It would take some combination of a utility pullback and/or a rebound in the transports to push the ratio higher. That would be a good sign for the stock market.
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Chart 6
TRANSPORTATION/INDUSTRIAL RATIO ALSO OVERSOLD... Chart 7 shows a ratio of the Dow Transports divided by the Dow Industrials falling since the end of 2014. The ratio, however, has now retraced 62% of its advance starting in 2009, which often acts as a support level. In addition, the ratio is rebounding from oversold territory below 30. That suggests that the weakness in the transports, relative to the Industrials, may be overdone and may be due for some correcting on the upside. That could mean a rebound in the transports, or a downturn in the industrials.
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Chart 7
DEFENSIVE QUALITIES SUPPORT THE DOW... Chart 8 shows the Dow Industrials still trading above their August and January lows. That's slightly better than the S&P 500 (bottom of chart) which has already undercut its August low. The Dow/SPX ratio (above chart) also shows recent outperformance by the Dow (by a couple of percentage points). That's most likely because the Dow is composed of large blue chip stocks many of which are dividend payers. At a result, the Dow often becomes one of the last havens when investors are worried about a possible market top. The Dow usually underforms when the market is rising, and outperforms in a weak market. That being the case, the Dow holding up a little better than the S&P 500 is actually a negative sign for the market.
