Transport stocks look to rebound after rough week

Just a week after hitting a record high and signaling good things for the market, the Dow Jones Transport Average (DJT) tumbled last week, falling 2.79%. It closed Friday at 9,471.27.

For investors, this shift was significant, as the DJT is part of the famous Dow Theory that holds that when the DJT and Dow Jones Industrials Average are rising in tandem, the market is bullish. That was happening the week that ended on July 14. But, last week, the DJT told a different story, with the index falling five straight days and several major transport companies reporting lower earnings.

Things changed on Monday of last week when J.B. Hunt Transport Services reported second quarter net profit fell to $97.9 million, down from $105 million in 2016. That was below analysts estimates, which expected 91 cents per share, not the 88 cents J.B. Hunt reported. The stock dropped more than 2%.

The news continued Thursday when C.H. Robinson posted lower-than-expected earnings due in part to higher rates it was paying to secure trailer capacity. Also on Thursday, FedEx warned investors that the impact to its TNT Express unit because of the Petya cyberattack suffered early in July would have a “material effect” on earnings.

By Friday, the airlines and railroads had gotten into the act with CSX Corp. and United Continental Holdings (parent company of United Airlines) providing “disappointing forecasts,” according to Lu Wang and Esha Dey, authors of a Bloomberg article on the transport slump last week title, “Dow Theory heroes have awful week after raising bullish flag.”

“Transport weakness is something to watch,” Richard Moroney, the editor of the Dow Theory Forecasts newsletter and chief investment officer at Horizon Investment Services in Hammond, Indiana, was quoted as saying in the article. “If industrials also succumb to selling, that would be a sign that maybe people are looking beyond just this disappointment that we’re seeing in rails and airlines.”

The drop in transport stocks may cause some investors to grow concerned about the overall health of the economy.

“Folks are recognizing that the economy is not really accelerating all that much,” John Larkin, an analyst at Stifel, said in the article. “Freight is a good indicator of retail and industrial sector health. If those sectors were truly robust, enough freight would be generated to tighten up transportation supply and demand.”

Many consider transportation’s fortunes a bellweather of the general economy, which is why under Dow Theory rising transport stocks combined with rising industrial stocks can trigger a bull market.

According to the Bloomberg article, for a bearish market to emerge, “both the transport and industryial averages need to erase at least one third of their previous advance and, should they bounce from there, fail to reach new highs.”

With higher rates dominating the trucking market, other transportation providers could suffer from lower earnings as they report. For now, though, any talk of a bear market is premature, even though the industrials average also had a bad week, falling in four out of five days. Still, at 21,580.07, the Dow is just off its record high.

It’s not time to rethink strategy just yet, but the transport market bears watching this week to see if it bounces back.