Watching the Transports Index Closely

While I'm not a Dow Theorist who gives much relevance to the confirming action in the Dow Transports in relation to the Dow Jones Industrials, I could not help but be struck with the high-volume selling in the Transport group on Friday. Known for being an early indicator of economic strength and weakness, could the Transports high-volume break back below its 50 day moving average be one of the first indicators of an impending double dip in the economy?

After nearly doubling from its February lows of 2146 to its most recent highs of 4045, the Transports seem to have become very toppy in here and should bear watching to see if recent multi-month support in the 3600-3700 range will hold. Conversely, any move through recent highs above 4045 would suggest that another up-leg is set to begin for the group.

As we look at individual names in the group, Burlington Northern (BNI), CSX Corp (CSX), and Kansas City Southern (KSU) all dropped between 5-6% on Friday on expanding volume. While sure to find short-term support at their up-trending 50-day moving averages, all of these stocks seem to be in the process of topping out and could ultimately make for good short-sale candidates on any light-volume bounce back up toward recent highs.

Needless to say, further weakness in the group would not bode well for the recent uptick in the economy or for further upside for equities as a whole. Add it all up and the action in the Transports bears close watching in the coming months.

Disclosure: We do not have any positions in the Dow Transport Average or in BNI, CSX, and KSU.

Comments

[Bull Run:]

I'm in total agreement, I've spoken to people in the railway industry, about their traffic, and it's down. An economy relies on trains and trucks, and when their business is down, the economy is down. No matter what wall street may try to indicate.

Oct 25 12:51 PM