The Dow Jones Transportation Average (DJTA) has gained ground with the broad market since October but is now approaching major resistance that raises the odds for a major downturn. Earnings season looks like a perfect time for this sell-off to unfold, warning shareholders in top components and funds to take some profits off the table and to tighten up risk parameters with stop losses and protective options plays.
This DJTA hasn't broken out to a new high, unlike the Dow Jones Industrial Average or the S&P 500 index, and is still trading well below two major peaks posted in 2018. This bearish divergence makes sense, given the cyclical nature of this market group and an economic expansion that has now entered its second decade. Adding to concerns, volume readings throughout the sector show limited buying interest since the second quarter of last year, lacking the firepower needed for a healthy uptrend.
Adding to sector headwinds, major players that include FedEx Corporation (FDX) and United Parcel Service, Inc. (UPS) now face a unique challenge from Amazon.com, Inc. (AMZN), which has launched a high-tech in-house delivery service. Former sector leader FedEx has plummeted to the bottom of the component performance list since the announcement of that initiative and shows no signs of bottoming out.
The iShares D.J. Transportation Average Index Fund (IYT) mounted the 2008 high near $100 in 2013, entering a powerful uptrend that topped out in the $160s at the end of 2014. It lost ground throughout 2015 and into the first quarter of 2016, dropping to a two-year low at $115. The subsequent recovery wave picked up steam following the presidential election, lifting the fund to $207 in January 2018.
Trade war talk then put a lid on the uptrend, yielding volatile price swings that culminated with a major decline at the end of 2018. It bounced strongly off that level in the first quarter of 2019, but the uptick fizzled out at $200 in April, within 40 cents of 2020's most recent closing price. This dismal nine-month performance could soon take a major toll on the fund, especially with multi-year resistance just overhead.
Delta Air Lines, Inc. (DAL) kicked off earnings season on a high note this week, beating fourth quarter expectations, but the airline also lowered first quarter guidance. Despite a positive reaction to the report, the stock is still trading just a few points above the high posted in January 2015. It has failed to capitalize on a long string of minor breakouts since that time, lowering the odds for a sustained uptrend, However, there isn't much resistance from the currently traded level up to the red trendline in the upper $60s.
Union Pacific Corporation (UNP), the highest-capitalized sector component, reports earnings next week. The post-news reaction could be instructive because railroads have held up better than other transportation sub-sectors in the past year, underpinned by healthy shipping volumes and firming crude oil prices. Union Pacific stock just posted an all-time high at $182.83, joining the top-performing Kansas City Southern (KSU).
A 2010 breakout gathered steam into the middle of the decade, reversing in the $120s in 2015. It finally cleared that resistance level in the fourth quarter of 2017, posting a string of new highs into April 2019, at the same time the index fund topped out. Price action has carved a bullish cup and handle pattern since that time, but the on-balance volume (OBV) accumulation-distribution indicator hasn't cooperated and remains stuck under the September 2018 peak. This bearish divergence lowers the odds for a major breakout.
The Bottom Line
The Dow Jones Transportation Average has failed to break out with major benchmarks and could soon enter an intermediate correction.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.