The Dow Jones Transportation Average (DJTA) tracks companies that move goods and services throughout the United States and the world. This distinguished index began life more than 100 years ago as the original Railroad Average used by Charles Dow to identify market trends.  Its composition has expanded greatly in the last century while it continues to play a major role in determining broad market strength and weakness. (For more, see: How Stock Market Indexes Changed Investing).

The index’s current incarnation includes 20 components in all major transportation modes, including airlines, truckers, railroads, car rental companies, packaging companies and ocean shippers. Capitalization tracks a broad range, with Union Pacific (UNP) at the top end of the spectrum with a 97-billion market cap and Matson (MATX) at the low end with a 1.8-billion market cap.

Index Funds

The index can be traded as single unit through iShares Dow Jones Transportation Average Index Fund (IYT). The fund prints just above 500,000 average shares per day as of 1 January 2015, making it less popular than index funds in other major market groups. Other transportation sector funds, including SPDR S&P Transportation ETF (XTN) and Guggenheim Shipping Index ETF (SEA) offer exposure but are constructed with different components. (For related reading, see: Shipping And Railroad Stocks At A Crossroads).

Notably the index has no inverse or leveraged funds to trade, due to the modest volume in the traditional funds. This has the unintended benefit of maintaining close alignment between the index and fund because there’s no active trader population for algorithms to target, as they do in numerous other sectors. This is especially beneficial in the last hour of trading, when more exotic funds can distort pricing through mathematical resets.

Index Components

The index’s real action lies in its blue chip components, which offer all sorts of trading and investment opportunities. It’s important to recognize catalysts that trigger broad-based sector trends, higher and lower, vs. those that trigger subsector-specific trends. For example, airlines show their greatest reactions percentage-wise when crude oil futures trend sharply, due to the group’s heavy dependence on expensive aviation fuel. (To learn more, see: Weak Oil Prices And Airline Profits).

Sub Sector   

Typical Catalysts

Airlines

Alaska Air Group (ALK)

Delta Airlines (DAL)

Jetblue Airways (JBLU)

Southwest Airlines (LUV)

United Continental Holdings (UAL)

 

Fuel Prices

Capacity Utilization

Price Wars

Labor Costs

Merger/Consolidation

Economic Engine

Taxation

 

Railroads

Csx Corp (CSX)

Kansas City Southern (KSU)

Norfolk Southern Corp (NSC)

Union Pacific (UNP)

 

Petroleum Production

Coal Shipments

Regional Strength & Weakness

NAFTA Trade

Economic Engine

Intermodal Market Share

Automobile Shipments

Taxation

Packaging Cos

C.H. Robinson Worldwide (CHRW)

Expeditors International (EXPD)

FedEx (FDX)

United Parcel Services (UPS)

 

Cyclical Strength & Weakness

Fuel Prices

Economic Engine

Currency Exchange Rates

Labor Costs

Market Share

Taxation

Truckers

Con-Way (CNW)

JB Hunt Transport Services (JBHT)

Landstar Systems (LSTR)

 

Fuel Prices

Economic Engine

Intermodal Market Share

Labor Costs

Taxation

Shippers

Kirby Corp (KEX)

Matson (MATX)

 

Baltic Dry Index

Currency Exchange Rates

Economic Engine

Intermodal Market Share

Rental and Lease

Avis Budget Group (CAR)

Ryder Systems (R)

 

Fuel Prices

Housing Market

Economic Engine

Business Conditions

Cross-Market Transport Positions

Watch index performance in relation to the Dow Jones Industrial Average (DJIA) and S&P 500 index. This is a variation of Dow Theory, which still has many adherents. (Read more in: Introduction To Dow Theory). Trends confirm when all three instruments post higher highs and higher lows in an uptrend, or lower highs and lower lows in a downtrend.  Buy the strongest sub-sectors during periods of relative strength and sell short the weakest sub sectors during periods of relative weakness.

The index also works as a counter play to the energy sector when inverse correlation lines up, as it does frequently during periods of strong trending in the energy complex. One reliable strategy builds a basket of components using a flat dollar exposure, balancing long and short positions between transportation and energy sector components. (See: Where And How To Trade Energy Stocks). Exposure is then adjusted nightly, increasing long exposure in the strongest plays and short exposure in the weakest plays, while maintaining overall risk at the flat basket level.

Bottom Line

Trade the Dow Jones Transportation Average directly through a traditional fund or break components into sub-sectors, using industry catalysts to build long or short positions.