A perfect Storm for Transports?


This post is for education purposes only and should not be interpreted as a trade recommendation.

Three weeks ago we highlighted airlines and railroads. Further developments suggest a near-perfect storm may be forming in the entire Transportation sector. Let’s take a look:

First, the right kinds of economic data are doing well. Some reports, like retail sales and housing, have clearly lagged estimates recently. But weekly rail traffic has been trending up, led by intermodal volumes (that’s when they load the 18-wheeler trailers right onto the train). There’s evidence of stronger manufacturing, seen in monthly employment reports and industrial production data. And, a steady uptrend in businesses building inventories.

Second, prices are rising. Wednesday’s producer price index report showed a 0.9 percent increase for Transportation and warehousing. That was not only the second-strongest reading in the last year. It was also quadruple the broader 0.2 percent gain across all categories. Airlines’ have echoed this trend, with carriers like United Continental (UAL), Delta Airlines (DAL) and Hawaiian (HA) boosting estimates this month.

Third, fuel prices are under control. Crude oil is at the top of its longer-term range, haunted by large inventories and the prospect of ever-increasing U.S. production. Fuel matters because it’s one of the top costs for transportation companies.

On final thought on the space: Other sectors of the market have a lot of blemishes at this point. Industrials like Boeing (BA) now must contend with trade-war concerns. Retail is still in the midst of massive store closures. Healthcare faces pressure to cut drug prices and uncertainty about disruption by the Buffett-Bezos-Dimon trio. Materials struggle with a lack of inflation. Utilities and REITs struggle with fears of higher rates. Energy is drowning in oil…

Only three areas in the market really look “clean” of such issues: Technology, banks and transports. Tech and banks have both outperformed by a wide margin so far this year, but transports remain little changed. (See RadarScreen® below.) Given their potential positives, investors may start to view the group as a value.

This post is for education purposes only and should not be interpreted as a trade recommendation.

RadarScreen® Showing year-to-date performance of various indexes
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David Russell is VP of Market Intelligence at TradeStation Group. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.