Analysis: Dow transports raise warning flag for U.S. economy

Tue Sep 25, 2012 11:16am EDT
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By Lynn Adler

NEW YORK (Reuters) - A slew of profit warnings from transportation companies like FedEx Corp (FDX.N: Quote) and Norfolk Southern Corp (NSC.N: Quote) is raising questions about whether the overall market will end this year on a high note.

An enduring part of market lore is the notion that gains in the well-known Dow Jones industrial average .DJI do not hold unless similar moves in the Dow Jones transportation average "confirm" them. Strategists tend to look askance when they see steady rises in the 30-stock industrial index when the transportation average is not doing well.

The idea behind this part of "Dow theory" is that manufacturers as well as the railroads, shippers and trucking companies that move their goods are barometers of the U.S. economy's performance.

That makes the recent moves in these averages somewhat ominous. Over the last six months, the Dow industrials have gained 2.9 percent, while the transports have fallen by 5.6 percent.

This is not the first time that industrials have rocketed upward while the transports were suggesting caution. Transportation stocks hit a peak in mid-1999 but later started to slip, while the Dow continued to rally through early 2000 before stumbling.

In recent months, most railroads and truckers have reported lower shipping volumes as consumers and businesses have worried about the weakening global economy and possible changes in U.S. tax regulations. The resulting profit warnings have pressured transport shares.

Until now, stimulus from the U.S. Federal Reserve and European Central Bank are helping to keep transport stocks from steeper losses, said Paul Mendelsohn, chief investment strategist at Windham Financial Services in Charlotte, Vermont.

If the Dow transports, which closed Monday at 4,960.8, fall below a critical level of 4,860 to 4,900, those shares might plunge and pull other stock indices down in sympathy, Mendelsohn said.   Continued...

Federal Express trucks head out for deliveries from a FedEx station in Los Angeles, California June 18, 2008. REUTERS/Fred Prouser