Dow Jones Transportation Average (DJTA) railroad components are trading lower after second quarter 2020 earnings, with CSX Corporation (CSX) and Union Pacific Corporation (UNP) beating profit estimates while coming up short on revenues. Revenues crashed around 25% year over year at both operations, highlighting a recessionary environment that may continue well into 2021. Union Pacific warned that fiscal year 2020 carload volumes will drop 10% or so from 2019 levels, while CSX warned that capital spending will come in at the "low end" of current guidance.

Key Takeaways

  • Transportation volumes often reveal economic strength and weakness.
  • Union Pacific has outperformed CSX for more than a decade.
  • Both companies expect strong headwinds for the rest of 2020.

Transportation stocks are "canaries in the coalmine" for the U.S. economic outlook, with shipping volume rising during periods of expansion and shrinking during recessions and downturns. We can expect similar reports from other DJTA components in coming weeks, highlighting the ongoing impact of the pandemic. Even so, hopes for rapid vaccine deployment may keep a bid under these issues, like it has in other market groups reporting dismal quarters.

Expansion is the phase of the business cycle where real GDP grows for two or more consecutive quarters, moving from a trough to a peak. This is typically accompanied by a rise in employment, consumer confidence, and equity markets. Expansion is also referred to as an economic recovery.

CSX Long-Term Chart (2006 – 2020)

Chart showing the share price performance of CSX Corporation (CSX)
TradingView.com

CSX stock broke out above the 1997 high at a split-adjusted $10.41 in 2006, entering a strong uptrend that topped out in the mid-$20s in 2008. A steep slide into March 2009 ended in the single digits, while the subsequent uptick remounted failed breakout support in June. Price action completed a 100% retracement into the prior high in 2011 and eased into a long-term sideways pattern, finally heading higher in 2014.

That uptick was short lived, topping out in the upper $30s at year end, ahead of a major correction that found support near $20 in January 2016. The stock broke out once again after the presidential election, booking impressive gains into the September 2018 high at $76.24. It posted an all-time high four points above that level in May 2019 and completed a head and shoulders breakdown in February 2020, dropping to a three-year low.

The bounce into the second quarter reversed at the .786 Fibonacci selloff retracement level in June before settling at the narrowly aligned 50- and 200-day exponential moving averages (EMAs). A hopeful bid into the earnings release failed the reach the prior peak, but this morning's downturn hasn't damaged the mildly positive technical outlook, so buyers may come to the rescue in the next few sessions. Even so, weak accumulation doesn't favor much higher prices in coming weeks.

Fibonacci numbers are used to create technical indicators using a mathematical sequence developed by the Italian mathematician, commonly referred to as "Fibonacci," in the 13th century. The sequence of numbers, starting with zero and one, is created by adding the previous two numbers. For example, the early part of the sequence is 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89,144, 233, 377, and so on.

Union Pacific Long-Term Chart (2006 – 2020)

Chart showing the share price performance of Union Pacific Corporation (UNP)
TradingView.com

Union Pacific has outperformed its sector rival in the past 15 years, also breaking out above 1997 resistance in 2006. The stock sold off to breakout support during the 2008 economic collapse and bounced strongly into the new decade, posting new highs in the fourth quarter of 2010. It booked historic gains into the middle of the decade, lifting to $124.52 in 2015, and fell to a three-year low in January 2016. 

A December 2017 breakout carved a series of new highs into January 2020's all-time high at $188.96, giving way to a vertical downdraft that relinquished more than 84 points into March. The subsequent uptick stretched higher than CSX, barely missing a 100% retracement before a June reversal settled on the narrowly aligned 50- and 200-day EMAs. The stock is trading about 10 points under June resistance after the news, with solid accumulation favoring higher prices.

The Bottom Line

Railroad stocks are selling off in Thursday's pre-market after key players posted dismal second quarter 2020 revenue numbers and warned about continuing headwinds.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.