Transportation Sector May Be Overly 'Clobbered'

The Dow Jones Transportation sector is acting really wonky. At first glance, it might seem to be getting tarred with the same brush as the general market. The wonky part is that it has completely decoupled from the crude oil market.

For example, on October 29th, 2008, West Texas crude oil futures went into free fall, closing the day almost down 10%. On the same day, the Dow Jones Transports went down 5.2%. Huh?

Other than the plausible explanation that people are selling everything, is that the market is starting to discount an economic slowdown which will damage the transport sector more than a decrease in fuel costs.

But in any case, the transport sector has gotten clobbered out of proportion. Take a look at the bullish percent index for the sector to see what I mean:

The index closed last week at 5% - meaning that only 5% of the components of the Dow Jones Transportation index are trading with a point and figure buy signal. Five percent.

To find a time when the number was this low we’d have to go back to the beginning of the year and then the summer of 2002. The advantage is that such an extreme oversold is occurring right at support (~4100 on the Transports index) where it has found support two other times - summer of 2006 and early 2008.

I don’t know if the market is signaling an economic shift with the way this sector is melting down, but I am willing to wager that it won’t be straight down. We’re about to see a bounce or snap back rally.

Comments

[Matt Blackman:]

Overly clobbered or just correcting to where it should be? First, the Dow Transport Average is a poor proxy for the transportation sector. It consists of just 20 cherry picked transport companies. If you look at a broader snapshot of the sector, the DJT has been providing an overly rosy outlook of what the sector is really doing.

According to Dow Theory, a trend is confirmed when both the Industrials and Transports move in the same direction. Dow Transports had been holding up artificially well compared to the Industrials and now that inequity is being addressed as those who have been holding these stocks realize that a rally isn't just around the corner as value analysts have been trying to convince us since this correction began...

Am putting together an article to explain this which I will post on SeekingAlpha called DJ Transportation Average Disconnect ...
Cheers,
Matt

2008 Oct 06 12:57 PM

[Matt Blackman:]

See my article Is there a Dow Transport disconnect?
seekingalpha.com/artic...?

2008 Oct 08 12:17 PM