Transportation stocks and exchange traded funds, such as the iShares Transportation Average ETF (NYSEArca: IYT) and the SPDR S&P Transportation ETF (NYSEArca: XTN), have been among the equity market’s best post-election performers.
However, with many of these funds residing near new highs, some traders think the group could be ready to retreat. The benefit of that scenario would be better pricing for investors looking to initiate tactical industrial sector positions.
IYT, which follows the Dow Jones Transportation Average, is higher by more than 12% this month. Transportation stocks were expected to benefit from lower oil prices and while that has been the case for airline stocks, other industry groups represented in IYT, including railroads, have struggled.
Market observers are optimistic about a cyclical recovery where U.S. consumers and businesses spend more, which would add to increased activity through railways and transportation sectors. Railroads are popular plays among some of the largest investors, including Bill Gates and Warren Buffett.
Headwinds remain for the industrial sector. The sell-off in the oil markets has weighed on capital spending from the energy sector as producers hold off on new projects, pressuring U.S. industrial companies and sector-related exchange traded funds.
“Price behavior looks quite straightforward in the case of TRAN. After a run up of almost 25 percent in 6 weeks, the index is bumping into heavy resistance now. It seems inevitable for a retracement to take place at this level,” according to ETF Daily News. “The key question will be how deep this retracement will go. The 8300 level could be tested soon, as that was the breakout level, as seen on the chart.”
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However, if the dollar falls as markets price in the Federal Reserve not being able to raise interest rates in December following Trump’s victory, industrials could benefit because some members of the sector generate substantial portions of their revenue overseas. Transportation stocks are part of the broader industrial sector.
The reality is that bond markets are pricing in the Fed raising rates at levels that imply markets would be stunned if the Fed doesn’t proceed with its first rate hike of 2016.
“Investors should closely watch how other markets will react as TRAN will reach that lower level. If risk assets, primarily the Russell 2000, will retrace mildly, and volatility in stock market will be contained, then we believe TRAN could be setting up for a buy opportunity,” according to ETF Daily News.
iShares Transportation Average ETF (NYSEArca: IYT)