Transportation Index Flashes Warning SignAug 13, 2012
Chad Karnes, CMT
The Dow Jones Transportation Index is one of many data points flashing warning signs that this market's rally is not what it seems.
Released each month is the Department of Transportation’sTraffic Volume Trends report which provides countless statistical details on the driving habits of Americans. Amongst other tidbits of information, it includes vehicle miles, rural highway use, urban interstate miles driven, as well as the state by state profile of total vehicle miles driven.
The latest release (May 2012) shows an improvement in total vehicle miles driven in the US, up 2.3% over 2011’s May. However, the trend since 2001 is shown in blue on the chart below and shows a steady decline in total vehicle miles driven since 2007. There are many reasons for this decline including demographics, recession, and more people working from home, but the key takeaway is that there are less and less miles being driven in America, even though the population is growing.
I have also added the Dow Jones Transportation Index to the chart for comparisons sake. There seems to be a small correlation between the two data sets, but nothing that would likely help your investing (more on that below).
The Transportation Index was created in the late 1800’s by Charles Dow around the same time he created the Dow Jones Industrial Average Index. The Transportation Index (originally called the Railroad Index) consisted of nine railroad companies and two non-rail companies. It has now grown to 20 rail, air, and transport companies including:
- United Parcel Service (NYSE: UPS) – A delivery services company
- GATX Corp (NYSE: GMT) – A railroad equipment financer
- Alaska Air Group (NYSE: ALK) – An airline
- JB Hunt Transport (NasdaqGS: JBHT) – A trucking company
Knowing that total vehicle miles driven is down since 2007 or the ability to name some of the components of the Transportation Index is nice and helpful at cocktail parties, but none of it will likely ever help you to make money in the stock market.
The technical and breadth tools that we use to analyze the markets have allowed us to identify a high probability trade setup on the Transportation Index.
The Dow Jones Transportation Average (DJI: ^DJT) continues to show a non-confirmation with the broader indices, and this is not a good sign for the market. A non-confirmation occurs when one index is making either new highs or new lows and the other index is not doing the same thing. This shows where leadership is (and is not). Right now that leadership is not coming from the Transportation Index, and that is important.
In fact, the Transportation Index is still 4% below its June high of $5250 closing at $5064 on 8/10. The Industrials Index (DJI: ^DJI) on the other hand is making new highs, up 3% since that same June period, for a 7% outperformance. In a strong market, these two indices should be confirming one another, which is not occurring and a big warning sign.
On 8/7 for subscribers in the ETF Profit Strategy Update, we stated, “The Transportation Index is giving us the trading setup with the great risk:reward parameters I have been waiting for…this sets up a shorting opportunity on the iShares Dow Jones Transportation Average Index Fund (NYSEArca: IYT)”. That trade is still in place with the IYT’s current price down to $90.34 from $90.87 when that report went out.
Right now there is a big non-confirmation occurring. This is a lot more important than the fact that total vehicular miles driven is up.
The ETF Profit Strategy Newsletter uses comprehensive technical analysis including sentiment and breadth analysis to provide actionable buy and sell recommendations. We provide analysis and strategies that actually help you make money in the stock market, not just sound good at cocktail parties.