The Dow Transports Are Increasing ..... Are The Industrials Next?

Posted by Bull Bear Trader | 4/24/2008 10:34:00 PM | , | 0 comments »

The Dow Jones Transportation Average has been rising since the end of January, moving nearly 25%, even as increased fuel costs take their toll on the transportation sector. During the same time, the Dow Jones Industrial Average has been relatively flat.

While not a perfect indicator, the transports have at times been a leading indicator for the industrials. The logic behind the indicator is as follows. If product is being shipped from supplier to retailer, than retailers are experiencing lower inventory and increased demand, eventually resulting in both the supplier and retailer booking revenues and earnings. The leading transportation indicator occurs since the transports are the first to signal demand, with the transportation companies also being the first to actually get paid for their services, resulting in higher valuations and stock prices. Both the suppliers and retailers have to wait a few months before seeing increased revenues at the retail level, or increases in accounts payable at the supplier level. As a result, increases in the transports can at times signal future revenues and stock prices for the industrial companies.

Of course, one important caveat is in order. Given the recent agricultural and energy demands, both the trucking and rail industries have seen increased business moving coal and crude, along with wheat, corn, soybeans, and fertilizers across that states. Given that they have pricing power to ship these high priced, and high demand cargo, they are also able to recoup most of their increased fuel costs. This business in particular is certainly contributing to some, if not most of the recent moves in the transports. Only time will tell if this trend transfers over to the entire economy, but at least for now the signal looks positive.