Reading the Transport Tea Leaves

I hope everyone had a great weekend!

I recently discussed a handful of travel stocks that have promise on a wider reopening — ones that could benefit from more Americans getting vaccinated and easing coronavirus restrictions.

However, I’m also watching the travel section for another reason … It’s called the Dow Theory.

If you haven’t heard of the Dow Theory, it’s essentially the belief that the transportation sector is a leading economic and stock market indicator.

When the transportation sector is running hot — or at least hotter than the broader stock market — it’s often seen as an encouraging sign for the economy, and, thus, Wall Street.

Today I’d like to dive deeper into the Dow Theory — what it is, what it could be telling us right now, and why I’m keeping tabs on a slew of transport stocks.

(Oh, and if you haven’t already registered, sign up now to watch a special LIVE broadcast I’m hosting at 8 p.m. ET this Wednesday, April 14! Whether you’re new to trading or a veteran, you don’t want to miss my favorite trade for Q2 and the 3-step system for trading this market. Don’t miss it!)

Behind the Dow Theory

As alluded to earlier, the Dow Theory is basically the philosophy that the transportation sector is a bellwether for the economy — and even the stock market.

When transports — which includes airlines, railroads, shipping, trucking, etc. — are booming and outperforming the broader market, it’s often viewed as a positive for the economy, because it means lots of goods being shipped and business being done.

In other words, a healthy transportation sector signals a healthy economy.

On the other hand, when there’s a lull in transports — and the sector begins to diverge from a booming stock market — it’s often seen as a precursor to an economic and/or stock-market downturn. 

So, in a nutshell, the health of the transportation industry is sometimes viewed as a way to take the pulse of both Main Street and Wall Street.

As far as stocks are concerned, Dow Theorists like to watch how the Dow Jones Industrial Average (Ticker: DJIA) is faring vs. the transportation sector — in this case, we’ll use the iShares Transportation Average ETF (Ticker: IYT).

Top IYT holdings include shipping giants FedEx (Ticker: FDX) and United Parcel Service (Ticker: UPS), railroad issues Norfolk Southern (Ticker: NSC) and Kansas City Southern (Ticker: KSU), airlines Alaska Air Group (Ticker: ALK) and Southwest Airlines (Ticker: LUV), and others.

If the IYT is running in step with the Dow, it doesn’t tell us a whole lot. But when the IYT starts to either out- or underperform the blue-chip index, many traders take this as a sign of what’s to come for the rest of the market.

Reading the Transport Tea Leaves

So, how are transports performing these days?

Well, the IYT recently took out a long-term ceiling in the round-number $200 region, and the exchange-traded fund (ETF) has been exploring new highs, closing last week at $262.33.

IYT chart – courtesy of StockCharts

What’s more, the transportation ETF has outperformed the broader Dow in 2021 — a change of pace from most of 2020.

You can see on the chart below that prior to the pandemic meltdown in late February 2020, the transportation sector was very much lacking vs. the general stock market.

IYT (red) vs. DIA (blue) – courtesy of StockCharts

Not that anyone could have seen the ‘rona downturn coming, but it’s certainly worth noting the wide underperformance of transports before and immediately after international quarantine orders.

Now, the IYT has overtaken the blue chips … and if history is any indicator, April could be a stellar month for this sector.

Over the past 15 years, IYT has ended April higher than where it started 67% of the time — tied with March for the ETF’s third-best month. (November has historically been best, with a 79% win rate, followed by December’s 71%.)

IYT seasonality since 2007 – courtesy of StockCharts

If you’re a die-hard Dow Theorist, all of this should be music to your ears.

As travel routes begin to reopen around the world, it should translate into a boon for many airline stocks …

Meanwhile, cruise liners have been battling the CDC about reopening U.S. ports, and Carnival Cruise Lines (Ticker: CCL) last week said cruise bookings are rising at a record clip.

Many of these stocks are starting to attract retail money, too, like what we saw with a few “meme stocks” earlier this year. 

In fact, United Airlines (Ticker: UAL) and Norwegian Cruise Line Holdings (Ticker: NCLH) were recently added to the new VanEck Vectors Social Sentiment ETF (Ticker: BUZZ) after a monthly rebalancing, and if they start attracting simultaneous attention from the big-money players, they could end up on my Robinhood Trader watchlist

We’ll see how this plays out, but if the transportation sector isn’t at least in your peripheral these days, it definitely should be.

Until Wednesday, Traders, when I come at you with our next Pit Report, and at 8 p.m. ET, I’ll be hosting my LIVE PRESENTATION on the state of the markets and my No. 1 option trade for the short term.

Register here right now!

Your Only Option,

Mark Sebastian

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