Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

Dow Jones Industrials Looking Good, But Transportation Leadership Has Vanished

Friday, August 24th, 2012
By for Profit Confidential

Dow Jones Industrials Looking GoodStock market breadth isn’t that strong, and what’s worrisome from my perspective is the non-confirmation from the Dow Jones Transportation Index. One stock market leader that I always follow is Union Pacific Corporation (NYSE/UNP), which is a railroad stock that just hit an all-time record high on the stock market of $126.91 per share. This is one component of the Dow Jones Transportation Index that’s doing great, but a lot of companies within the index haven’t participated in the recent rally, and it’s a real divergence.

Of course, oil prices reversed their earlier trend and recovered significantly from below $85.00 a barrel. Certainly, this would be a drag on the index. But the Dow Jones Transportation Index has mostly led the Dow Jones Industrials and the S&P 500 Index since the stock market low in March of 2009, so the divergence is a red flag as far as I’m concerned.

A lot of institutional investors are not behind the recent stock market breakout, citing less than inspiring economic fundamentals and a mediocre technical picture. But for all the analysts now calling for investors to sell their equities, the stock market remains fairly priced, given the earnings outlook. Fundamentally, there’s nothing wrong with the Dow Jones and the other benchmark indices at their current levels.

Stocks that have been breaking down in the Dow Jones Transportation Index include J.B. Hunt Transport Services, Inc. (NASDAQ/JBHT), United Parcel Service, Inc. (NYSE/UPS), and Landstar System, Inc. (NASDAQ/LSTR) to name a few. (See “Why Getting the Business Cycle Right Is the Only Thing That Pays.”) It very well could be the oil trade that’s brought these shares down, but I’m still suspicious. You can’t really have a true bull market in the main stock market averages without a confirming trend in the Dow Jones Transportation Index.

One stock market trend that’s been really noticeable the last few years is the penchant that institutional investors have had for large-cap, higher dividend paying stocks. With big investors buying dividend income, it has propelled the Dow Jones Industrials and many stocks within the S&P 500 Index to new highs. It’s perfectly understandable why investors want the income; nothing else in this world is as secure as dividends from a well-established U.S. company. The security of dividend income has also been advanced by the huge cash hoards that corporations continue to maintain. Even if dividend rates aren’t going up, a three-percent yield, say on a company like PepsiCo, Inc. (NYSE/PEP), is attractive when the rest of the world is falling apart.

I see the Dow Jones Industrials ticking higher until the next Federal Open Market Committee (FOMC) meeting. Current investor sentiment rests with the Federal Reserve, and the stock market will suffer if the central bank does nothing at its next meeting.

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The stock market is fairly valued, and most large corporations are extremely healthy. Near-term investment risk lies with the Federal Reserve to the exclusion of all other factors.

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Mitchell Clark - Equity Markets Specialist, Financial AdvisorMitchell Clark, B. Comm. is a Senior Editor at Lombardi Financial specializing in large- and micro-cap stocks. He’s the editor of a variety of popular Lombardi Financial newsletters, such as Income for Life and Micro-Cap Reporter. Mitchell, who has been with Lombardi Financial for 17 years, won the Jack Madden Prize in economic history and is a long-time student of equity markets. Prior to joining Lombardi, Mitchell was as a stock broker for a large investment bank. Add Mitchell Clark to your Google+ circles