By John Spence & Tom Lydon
The iShares Dow Jones Transportation Average Index Fund (IYT) has moved out to a big lead versus the overall market since late 2012 and actually rose to new record highs before SPDR Dow Jones Industrial Average ETF (DIA).
However, a sharp sell-off in FedEx (FDX) this week on disappointing earnings has put the brakes on the transport ETF's rally. The fund was down nearly 2% on Thursday, more than the Dow Industrials, and is set to decline for a fifth straight day.
FedEx is the transport ETF's third-largest holding at 7.6% of the portfolio. On Thursday, the company said its third-quarter profit fell more than 30% from the year-ago period.
"The third quarter was very challenging due to continued weakness in international air freight markets, pressure on yields due to industry overcapacity and customers selecting less expensive and slower-transit services," said Chief Executive Frederick Smith. The company plans to reduce capacity in Asia and retire some of its older aircraft.
"Express shipping seems much less urgent these days," the New York Times reported. "To save money, online shoppers and big businesses are increasingly willing to wait a little longer for goods to arrive. While that may mean savings for consumers, it is hurting FedEx's core business - express delivery."
FedEx shares are down about 12% this week. The stock slump has triggered concerns the transportation ETF may be set to cool after a big rally.
The Dow Jones Transportation ETF has been crushing the market with a gain of 19.6% the past six months versus 7.6% for SPDR Dow Jones Industrial Average.
Yet Jefferies analysts think the transportation sector's outperformace will continue this year.
"2013 is poised to be the year of transports," Peter Nesvold and Tavio Headley, analysts at Jefferies, wrote in a client note, according to an Investor's Business Daily report.
"We believe that this rally still has legs, given nascent signs of wholesale restocking and continued strength in auto sales and housing prices," Jefferies analysts wrote. "Accordingly, we see another 15 or so points of outperformance left in the group based on the historical swings."