A niche sector of the financial markets that can often be overlooked by mainstream investors is transportation. Relatively low levels of volatility combined with predictable business models lead many investors to other sectors such as metals and energy. However, followers of Dow Theory and other tenets of technical analysis generally look to the transportation sector because it is often used as a leading indicator to confirm a broader move in the overall market. In this article, we take a look at the state of the transportation sector and try to determine the implications for prices in the weeks and months ahead. (See also: How to Analyze the Transportation Industry.)
Investors interested in gaining exposure to a broad range of transportation companies tend to look to exchange-traded products such as IYT. Fundamentally, this fund comprises 20 companies including airlines, railroads and trucking companies. Taking a look at the chart below, you'll notice that the price is currently trading near the combined support of its 200-day moving average and an influential trendline. This chart pattern suggests that the risk/reward is in favor of the bulls and that the ETF could be poised for a move higher. Fundamental traders may look to this strength in transportation as a sign that the economy is stronger than many anticipate and that prices could be headed higher. (For more, see: Top 3 Transportation ETFs for 2017.)
One of the best strategies for identifying high-quality companies within a niche sector such as transportation is to check the top holdings of sector-specific funds such as IYT. With a weighting of 13.68%, FedEx is by far its biggest holding and is undoubtedly one of the largest beneficiaries of the continued shift to online shopping. Taking a look at the chart below, you'll notice that the stock is trading near the major support of the 200-day moving average and that this level has consistently guided the price higher over the past 18 months. As the price retraces toward the support level, which has been the case in recent weeks, active traders will look to place their buy orders because that is the point that minimizes the capital at risk. Based on this chart, stop-loss orders will likely be placed below $196 in case of a sudden shift in fundamentals. (For more, see: FedEx Stock Nears Major Buy Signal.)
Another transportation company that is worth a closer look is Norfolk Southern. From an investor's perspective, the company's market capitalization of approximately $35 billion and dividend yield of about 2% make it one of the largest and most popular railroads in the U.S. Taking a look at the chart, you can see that the recent retracement has sent the price toward the long-term support of its 200-day moving average. Traders will take note that the last time the price was this close to long-term support was in July 2016, which turned out to be the best entry point since the golden crossover earlier in 2016. Based on this chart, traders will likely look to add to their positions as close to $114 as possible and set their stop-loss orders below the July swing low in case of a surprise shift in fundamentals. (See also: Railroads Could Lead Transport Stocks to Higher Ground.)
The Bottom Line
Transportation tends to be an under-followed sector in the financial markets, but based on the charts discussed above, it appears as though now could be a good time to add the sector and its components to your watchlist. Lucrative risk/reward scenarios could trigger a break higher, which could also be a leading indicator of a continued strengthening of the economy. (For more, see: Tips for Trading the Dow Jones Transportation Average.)
Charts courtesy of StockCharts.com. At the time of writing, Casey Murphy did not own shares of any of the products mentioned.