Many transportation stocks have turned higher in recent weeks and should break out if Canada, Mexico and the United States complete a trilateral trade agreement that replaces NAFTA. That buying impulse should be broad based if it happens, lifting airlines, truckers and railroads with equal fervor. It could also be strong enough to quicken the ascent of the S&P 500 toward 3,000, which could mark resistance for months to come.
Sector funds offer the lowest risk exposure to an agreement because speculators have already bid up companies most dependent on North-South trade routes. That list includes Kansas City Southern (KSU), the largest U.S. rail line into Mexico. The stock ran in place for more than a year, awaiting the outcome of negotiations, and turned sharply higher in July. It’s now trading at an all-time high, underpinned by solid buying interest that could sustain upside into the next decade.
iShares DJ Transportation Average Index Fund ETF (IYT) cleared 2008 resistance in 2013, entering a trend advance that ended at 168 in November 2014. It mounted that level after the presidential election, stalling at 206.73 in January 2018. The subsequent correction pounded out higher lows into July and took off in a straight line, stalling just 27-cents above the prior high last week. It’s now grinding sideways at that level, waiting for positive news to trigger a breakout.
The depth of the correction generates a measured move target at 237, marking a 15% rally above the most recent closing price. That level has also aligned with a trend line (upper red line) connecting the last two highs, adding reliability to the prediction. On the flip side, a failure to include Canada in the agreement is likely to generate a rapid sell-the-news reaction that could reach the 50-day EMA, now rising from 198.
Amex Airline Index (XAL) has carved a volatile sideways pattern since the fourth quarter of 2016, reaching 122 in July 2017 and failing to break out above that level during the January and March 2018 rally attempts. The index broke support at the August 2017 low in June 2018, dropping into double digits before turning higher and squeezing shorts in a recovery wave that reversed at May resistance in July.
The index turned higher three weeks ago and has completed an inverse head and shoulders pattern that measures to 13-month range resistance following a breakout. This is a tough industry to play through ETFs because it’s poorly covered and the go-to U.S. Global Jets ETF (JETS) books less than 25,000 shares per day on average. As a result, stocks make better sense here, with United Continental Holdings, Inc. (UAL) and Delta Air Lines, Inc. (DAL) exhibiting the most sector strength.
Transport component Landstar System, Inc. (LSTR) could offer the best trading opportunity in the trucking group following a trilateral agreement. It topped out in the low 80s in December 2014 and fell to a 2-year low in 2016, ahead of a recovery wave that mounted the prior high in November. The stock spent 9 months testing new support and then turned higher, hitting an all-time high at 118.60 in February 2018.
A decline into April ended at the 200-day EMA, giving way to a bounce that reversed within two points of the prior high in June. The stock tested the moving average a second time in July and turned higher, reaching within 50 cents of resistance last week. On Balance Volume (OBV) has now risen to an all-time high, raising the odds of a breakout that could reach 140 as an initial upside target.
The Bottom Line
DJ Transportation Average should break out if Canada joins Mexico and the United States in a trilateral trade agreement, generating a broad-based advance that lifts railroads, airlines and truckers.
<Disclosure: the author held no positions in aforementioned securities at the time of publication.>