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Fed Drives Transports Off Edge Of Cliff


  • Super Tuesday's premature excitement commenced via an emergency Fed rate cut due to coronavirus fears, failing to assuage investors' worries.
  • As additional measures of drastic monetary policy are taken to combat supply shocks, data suggests the public is likely to restrict movement and in turn, precipitate a slump in demand.
  • Consequently, this may roll over into transports and could present a good opportunity to sell the iShares Transportation Average ETF.

Investment Thesis

The Federal Reserve just put the pedal to the metal via an emergency rate cut. Yields on the benchmark 10-year Treasury note fell below 1% for the first time ever. Other financial markets such as industrials recently made history as well. Investors continue to reassess risks as stability is nowhere to be seen.

On February 27, the Dow Jones Industrial Average (NYSEARCA:DIA), an index that tracks 30 large publicly-owned companies trading on the NYSE and the NASDAQ, succumbed to its largest one-day drop in history per points basis - a decline of 1190.95. The next Monday on March 2, the index realized the largest one-day gain in the same terms - an increase of 1,293.96 points. The next day, with the advent of the Fed's emergency rate cut, the index had stumbled once again - nearly 800 points. So long as the Fed continues spooking the market, I expect this type of behavior to continue in the near-term pari passu.

As such, actual volatility was and will continue to be ripe for the picking due to implied volatility expansions amidst the increasing uncertainty - I forecasted such two weeks ago, explaining the high likelihood for a dead-cat bounce in both the Shenzhen and Shanghai Composites as well as the high probability that this would precede similar declines in U.S. indices. Moreover, I elaborated as to how certain knock-on effects would transfer into a spike in the VIX and in turn, an attractive risk-to-reward opportunity for VXX (BATS:VXX). The timing was very much luck, as much as I want to say it was purely the analysis.

Although it may be too late to take advantage of the 80%+ price appreciation in the above-mentioned VXX call, going bearish with transports through the iShares Transportation Average ETF (BATS:IYT) seems like

This article was written by

Holden joined Seeking Alpha in 2015. No longer a contributor, he currently works on the Listed Derivatives desk at a leading global investment bank.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in IYT over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (6)

Holden Brooks Weaver profile picture
Update: "Prompted by a collapse in demand due to the coronavirus pandemic, American Airlines (NASDAQ:AAL) plans to cut 75% of its international flights from March 16 through May 6 and ground nearly all its widebody fleet." - SA and Reuters

Moreover, February imports to west coast ports fell 20.6%.
IT Gal profile picture
In the end, it doesn't matter if it was a virus or not...the cycle always wins.
It was only a matter of time...and that time has caught up.
Globally we've been slowing for well over a year now. (We peaked about Sept 2018)
Bonds have been telling us this since last year...
Equities were blinded and lulled by Fed 'Pump up the Volume' liquidity...and ignored it.
Great for peaks...bad for reversions.
Enter the virus, which just pushed up the timeline and made it that much more violent.
The cycle always wins.
Trade wisely all. Cheers.
Holden Brooks Weaver profile picture
@IT Gal Thank you for the comment. That is a succinct clarification of the thesis. There seems to be confusion where readers are connecting the Fed decisions as a cause for declines in the DJTA, when the article only suggests Fed cuts have not historically helped the SPX.
New Low Observer profile picture
The Dow Jones Industrial Average (DJTA) peaked in September 2018 and could be argued as peaking in January 2, 2018.

The Fed's recent actions have nothing to do with the decline (or rise) in the DJTA.
Holden Brooks Weaver profile picture
Yes, you can see those peaks in the last chart. I agree the Fed’s recent actions have little to do with the decline of the DJTA and more with the supply-cum-demand shortages and recent prints in economic data, as explained. Title could be better. Thanks for the comment.
Henry_22 profile picture
2008, 2008, 2008!!
Hope you have some money lying around!

"Someday this war's gonna end."
Lt.Col. Bill Kilgore
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