Transport ETF Provides Clues to Recovery

Includes: BNI, CSX, FDX, IYT, UNP, UPS
by: Invest With An Edge

By Brandon Clay

Investors typically favor stocks and sectors that they view as somehow glamorous or sexy. This could mean high-flying tech stocks like Apple (NASDAQ:AAPL) or Google (NASDAQ:GOOG) or high-beta commodities and materials stocks like Freeport-McMoRan (NYSE:FCX). Such an approach can be rewarding, but if you’re looking for exposure to the real economy, the transportation sector is a good place to look.

Arguably no sector’s fortune is as tied to the economic climate as transportation. If you’re a fan of technical analysis, you know that the Dow Theory states that moves in the transports index usually portends a similar move in the more widely followed Industrials Average. Investors need to watch transportation stocks.

We recently highlighted two of the biggest names in the shipping space: FedEx (NYSE:FDX) and UPS (NYSE:UPS). Investors who want exposure to the sector at large may want to consider the iShares Dow Jones Transportation Average ETF (NYSEARCA:IYT). IYT tracks the aforementioned 20-stock Dow Jones Transportation Average, which includes FedEx, UPS, the four largest U.S. railroad operators, and several trucking firms.

These are companies, that common sense would argue, have an unparalleled correlation to the U.S. economy. They ship nearly everything you can think of. FedEx and UPS perform well when businesses are sending more packages across the U.S. or the world. Railroad operators like CSX (NYSE:CSX) and Union Pacific (NYSE:UNP) move everything from cars to coal. When shipping volumes are high, you can bet the broader economy is performing well.

In fact, IYT’s exposure to the rail operators alone may be a good reason to take a look at the ETF. Warren Buffet is making a significant bet on the future of the U.S. economy with his $34 billion purchase of Burlington Northern Santa Fe (BNI). IYT provides exposure to the entire sector and can save you hours of research.

On a technical basis, IYT is starting to look attractive. This week the shares hit a new 52-week high at $76.69. Even if the market undergoes a small correction, IYT should find support at $73 (its December breakout and near the 50-day moving average). A retreat to that price may be a buying opportunity.

Either way, investors will want to watch IYT for hints about where stocks are headed in 2010. It could be your ticket to riding the wave up the charts. To buy into a potential recovery before it happens, go with IYT.

click to enlarge

IYT Chart

Disclosure covering writer, editor, publisher, and affiliates: long AAPL. No positions in any of the ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.