Don't Believe that Transports always lead the Way: Part 1

by Wayne Ferbert on March 26th, 2012

There was some stir in the market last week about the performance of the Transport stocks. Many analysts believe that the Transport industry leads the way in all rallies and all declining markets. The rationale is simple: makers of products need to have raw goods shipped to them and then in turn ship their products. So, when future demand is good or weak, the results for these firms tend to forecast the coming change for other companies down the line.

The argument makes some sense and is hard to argue with as in most rallies and declines, the transport indexes have been highly correlated with the broader markets. And the argument is so simple and straightforward – that it makes it hard to argue with it.

I am here to argue with it today. I believe that you shouldn’t try to time this market – and the transport pull back is just an excuse to try to time the market. I am confident that this market will continue to climb upwards – more than likely on a zig-zag pattern for the next year to come. But the general slope will be upwards.

The reasons I won’t let the Transport price performance last week scare me away? First, the pull back is just 5 days of data. This is just not enough data to base a portfolio adjusting decision on. Five days is not enough for me. Second, I found conflicting data among three different transport indexes last week: one was flat for the week, one was down 2%, and one was down 3.5%. The NASDAQ Transport index was flat while the Dow Jones was down 2%. This kind of conflicting data casts doubt for me about the conviction of the move in Transports.  

Overall, the transports have participated in this rally – so a minor pull back in this sector on a week when the market pulled back slightly is not abnormal. However, if the market continues to march upwards and Transports pause or retract, then I might ask a lot more questions around this trend. Maybe it would just signal a buying opportunity in Transports – or it might signal a real shift that we need to watch.

For this Wednesday’s blog post, I will examine the historical moves in Transports and see whether they are a good predictor of a future change in the markets.

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