North America's transportation sector has a history of weakness from the beginning of August to the middle of October. What are the prospects this year?
According to Thackray's 2012 Investor's Guide, the Dow Jones Transportation Average dropped an average of 4.2 per cent per period from August 1 to October 9 during the past 21 periods. The transportation sector is particularly sensitive to changes in economic and corporate expectations. Economists and analysts frequently over-estimate annual GDP growth and earnings estimates in the first half of the year following optimistic predictions offered by management in annual reports and annual meetings.
Following the release of second quarter results, economists and analysts frequently realize that estimates are too high and adjust them lower. Equity markets -- the transportation sector in particular -- respond accordingly. Not surprising, the month of August has recorded the fourth-weakest performance for equity market indices during the past 60 years. According to Thackray's 2012 Investor's Guide, the weakest sub-sectors in U.S. equity markets in August during the past 20 periods were transportation, autos & components and airlines.
The pattern is repeating this year. On July 27, economists at major Wall Street brokers lowered consensus estimates for U.S. Gross Domestic Product (GDP) growth for 2012 following news that second-quarter real GDP grew only at a 1.5 per cent annual rate. Consensus for third-quarter real GDP was reduced from 2.0 per cent to a -0.1 per cent annual rate.
Earnings reports released by companies in the transportation sector last week also gave a clue on prospects for the August/October period of seasonal weakness this year. A benchmark of the transportation sector, United Parcel Services saw its shares falling sharply after reporting second quarter earnings in line with consensus, but after lowering its 2012 guidance. According to chief executive Scott David, "Increasing uncertainty in the United States, continuing weakness in Asia exports and the debt crisis in Europe are impacting projections of economic expansion". Analysts reduced their estimates accordingly.
Another influencing factor in the current quarter is increasing fuel costs. Crude oil prices have gained 16.5 per cent and distillate fuel oil prices have increased 14.8 per cent from their lows at the beginning of June. Rising transportation fuel costs will weigh on third-quarter profits.
On the charts, the Dow Jones Transportation Average at 5,126.65 has a deteriorating technical profile. Intermediate trend is down. Support is at 4,795.28. A test of resistance at 5,290.06 is imminent. Other resistance levels exist at 5,361.06 and 5,390.11. Short-term momentum indicators recently declined to a neutral level. Strength relative to the S&P 500 Index has been negative since the beginning of June.
Preferred strategy is to avoid the transportation sector and related equities and Exchange Traded Funds until early October when seasonal influences turn positive. The Exchange Traded Fund that tracks the Dow Jones Transportation Average is iShares Dow Jones Transportation Average Index.
Don Vialoux is the author of free daily reports on equity markets, sectors, commodities and Exchange Traded Funds. He is also a research analyst at Horizons Investment Management, offering research on Horizons Seasonal Rotation ETF (HAC-T). All of the views expressed herein are his personal views although they may be reflected in positions or transactions in the various client portfolios managed by Horizons Investment. Horizons Investment is the investment manager for the Horizons family of ETFs. Daily reports are available here.
Don Vialoux