Market Insights / Commentary

Stocks going places, Part 1: Railroads

By David Russell

Transportation stocks provided a strong bullish signal in late 2017. It quickly proved correct, and now’s a good time to return to the theme.

First, remember that transports have traditionally been viewed as forward-looking indicators for the economy and broader market. More stuff getting shipped and more people traveling, it’s assumed, means business is good overall. The opposite is also true when transports struggle. Charles Dow, co-founder of The Wall Street Journal, noticed this relationship over a century ago, and it still bears his name: “Dow Theory.”

Now’s a good time to think about this pattern because most economic data has been so strong. Let’s start with railroads — a cohort of stocks from the days when Mr. Dow was covering the market.

TradeStation’s award-winning platform provides you with a whole slew of industry indexes. One of those, the Dow Jones U.S. Railroad Index ($DJUSRR), pushed above its 50-day moving average on Monday for the first time since the broader market tumbled in early February. Interestingly, the last couple of times the index rallied above that moving average in September and November, it proceeded to make new highs.

Dow Jones U.S. Railroad Index

Dow Jones U.S. Railroad Index

Company news for members of the group has been mixed. Union Pacific (UNP) cratered on January 25 after earnings missed estimates. The number-two player by market cap, CSX (CSX), has also faced some leadership worries after the unexpected death of CEO Hunter Harrison, although it did increase dividends and buybacks this month.

But other indicators may paint a brighter picture. Industry-level data from the Association of American Railroads, for instance, shows traffic running at its highest levels in the last four years. Reuters also just released a survey of how railroads and truckers may be squeezing other firms thanks to better pricing power.

Speaking of higher prices, attention in the last month or so has firmly shifted to inflation. That could offer a double benefit to the whole transport universe — especially airlines. Be sure to check back for our next post on those.

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