Transportation's Weak Spots

Sunday’s Chart of the Week: Falling Transports looked at the recent weakness in the Dow Jones Transportation Average (DJTA) and included a study of the performance of the index relative to the S&P 500 index.

Today I am going to look under the hood of the DJTA and highlight four often overlooked transportation sub-sector indices:

• Dow Jones US Railroad Index ($DJUSRR)
• Dow Jones US Airlines Index ($DJUSAR)
• Dow Jones US Trucking Index ($DJUSTR)
• PHLX Marine Shipping Index ($SHX)

The chart below, which plots each of the above sub-sector indices as a percentage of the DJTA, shows that airlines have been the biggest laggard relative to the broader transportation average over the course of the past month, while railroads and truckers have also not been able to keep pace with the DJTA as of late. The relative strength in the transportation sector has come from the marine shippers – a point that is bolstered by the recent strength in the Baltic Dry Index (not shown in the charts.)

While I have yet to see any ETFs for the railroad and trucking sectors, two ETFs that are available are the popular Claymore/Delta Global Shipping ETF (SEA) and the less active Claymore/NYSE Arca Airline (FAA).

[source: StockCharts]

Comments

[Mark Bern:]

My apologies to the author, but I believe you meant that "trucking" was the only sub-sector that is holding up, not "marine." Looking at the charts you so graciously provided, the marine index is dropping along with airlines and railroads. Only the trucking index is maintaining its strength. But even trucking is not go up; it is merely staying level.

What does all this mean? IMHO, it means that wholesalers, retailers and distribution centers have begun to stock up for Christmas, replenishing their inventories which were methodically and consistently reduced over the first half of the year and more.

The annual cycle begins with ordering in July and August. Manufacturing and imports from overseas suppliers gets going during August and continues through October or longer (in order to be able to replenish sell outs). Orders begin shipping in September and continue through most of December, but the bulk comes in October and November. Most of this is transported via trucking. So, trucking should hold up best this quarter. Airlines are the most expensive and, therefore, I would expect their business to continue contracting. As manufacturing, agriculture and energy go, so go the railroads. They have one strong leg and two broken, so they won't die, but the picture isn't rosy in the short term. Shipping volumes may begin to drop (at least coming into the US) unless the BRIC economies and other developing countries can grow enough to offset the softness in the US and EU zones. There will always be some traffic because nothing has shut down, but I wouldn't expect major increases in the BDI from here.

Oct 27 12:37 PM