The North American transportation sector recently has been a stellar performer. Since last November, the Dow Jones transportation average has gained 36.5 per cent and reached an all-time high last week. However, technical, seasonal and fundamental analysis indicates that now is good time to take profits in stocks and related exchange-traded funds in the sector.
Thackray's 2013 Investor's Guide notes that the transportation sector on average has a period of seasonal weakness from August 1 to October 9. Investors, who shorted the Dow Jones transportation average during each of the past 22 periods, realized a return of 4.6 per cent. The trade was profitable in 17 of the 22 periods. During the same period, the S&P 500 index dropped an average of 2.5 per cent per period. Thackray's Guide notes that "In the late summer months, investors tend to question the strength of an economic run which in turns puts pressure on the transportation sector." History is repeating. U.S. second-quarter real annualized GDP growth to be reported next Wednesday is expected to slip to 1.2 per cent from 1.8 per cent in the first quarter.
The Dow Jones transportation average has a deteriorating technical profile. Strength relative to the S&P 500 index turned negative this week. Short-term momentum indicators (Stochastics, Relative Strength Index, Moving Average Convergence Divergence) began to trend lower from overbought levels. The Dow Jones transportation average also fell below its 20-day moving average.
Responses to second-quarter reports in the sector released to date are flashing a warning sign. Share prices for Norfolk Southern, Canadian Pacific, Canadian National Railway and Southwest Airlines came under "sell on news" pressure after releasing second-quarter results that were in line or better than consensus. In addition, FedEx and United Parcel Services lowered earnings guidance for 2013.
Profit margins in the sector are expected to tighten in the second half of 2013. Crude oil prices have increased 26 per cent since mid-April and fuel costs have increased accordingly. In addition, the railway industry is facing increasing costs due to greater regulation following the accident in Quebec.
Seasonal profit-taking and introduction of short positions in transportation ETFs are preferred. The most actively-traded exchange-traded fund is iShares Dow Jones Transportation Average Index. Units track the Dow Jones transportation average, an index consisting of 20 U.S.-listed transportation stocks. In addition, SPDR S&P Transportation ETF units are available. Units track a basket of 42 U.S.-based transportation stocks.
Don Vialoux is the author of free daily reports on equity markets, sectors, commodities and exchange-traded funds. Daily reports are available at http://www.timingthemarket.ca/. He is also a research analyst for Horizons Investment Management Inc. 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 Management.