The Dow Jones Transportation Average, along with sector-related exchange traded fund, has been under heavy pressure over the past week. Nevertheless, with the Dow Jones Industrial Average maintaining its momentum, transports may still stage a rebound.
The iShares Transportation Average ETF (NYSEArca: IYT), which tracks the Dow Jones Industrial Average Index, fell 4.9% over the past week, compared to the 1.6% dip in the SPDR Dow Jones Industrial Average ETF (NYSEArca: DIA), which follows the Dow Jones Industrial Average Index. [Transportation ETFs Have Momentum On Their Side]
The quick fall off comes after rail company Kansas City Southern (NYSE: KSU), which makes up 7.3% of IYT, cut its 2015 revenue outlook on lower energy prices, reports Kristen Scholer for the Wall Street Journal.
Observers are particularly worried because transport stocks are a better gauge of the underlying economy than the average U.S. company and could foreshadow potential weakness ahead, Financial Times reports.
The transportation sector’s outlook will depend on U.S. and global activity as the rail and shipping companies depend trade to move goods. IYT’s sub-sector weight sinclude road & rail 47.7%, air freight & logistics 27.9% and marine 7.7%.
Tim Anderson, managing director at MND Partners, is warning that if the Transportation Average breaks below its 8,650 to 8,675 range for more than a day or two on a closing basis, it would complete a five-month topping pattern, which would provide a pessimistic outlook on the six-year bull market.
IYT briefly tested its 200-day simple moving average Thursday but bounced back 0.2% Friday.
Nevertheless, according to the Dow Theory, IYT may still plod along as the Dow Jones Industrial Average trades above key levels. The Dow Theory stipulates that if an upward trend in one of its industrial or transportation averages increases above a previous high, it is accompanied by a similar advance in the other index.
DIA is currently trading about 3.0% above its 200-day simple moving average while IYT is 0.9% above its 200-day average.
Anderson argues that transports will have to remain above their December 29 closing high of 9,217.44 to back a bull stock market. However, if the Transport Average dips continues to fall below its January lows, it would be a bearish signal.
iShares Transportation Average ETF
For more information on the transportation sector, visit our transportation category.
Max Chen contributed to this article.
Full disclosure: Tom Lydon’s clients own shares of IYT.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.