Dow Jones Transports Leading the Market?

economic indicatorThis market is definitely looking tired after such a strong run since mid-October.

The performance of transportation stocks has been noticeable this year. The Dow Jones Transportation Average has actually outperformed the NASDAQ Composite year-to-date. In my mind, when there’s leadership from this group, it’s a compelling, traditional bull market indicator. Countless component companies are pushing record highs.

Equally as impressive is the performance of the Russell 2000 index, which has pretty much mimicked the NASDAQ Composite over the last two years.

A divergence became apparent in the beginning of July, as the Dow Jones Industrial Average began underperforming the other indices. It’s as if investors upped their risk tolerance, willing to bet on more risky equity assets as they felt more comfortable being bullish on a stock market that’s already gone up.

Over the last 12 months, the Dow Jones Transportation Average has been the leading index (excluding biotechnology stocks, which aren’t comparable). While outperforming the Russell 2000 by a slim margin and the Dow Jones Industrial quite significantly, I think the Dow Jones Transportation Average remains the leading index going into 2014 and a great indicator for the broader market.

Among the railroad stocks that are included in the Dow Jones Transportation Average, Union Pacific Corporation (UNP) bounced back nicely higher over the last five weeks after experiencing a lasting price consolidation the past six months. It will be interesting to see if the stock can hold above its all-time record-high of $165.18. Doing so will be meaningful.

CSX Corporation (CSX) is also a component of the Dow Jones Transportation Average, and it, too, seems to have broken out of its price consolidation. Earnings estimates for this railroad company have gone up slightly for this fiscal year and next.

Also breaking out of their price consolidations this year are Norfolk Southern Corporation (NSC), which jumped substantially after it reported very good earnings results, and Kansas City Southern (KSU), rounding out the four big public railroad companies included in the Dow Jones transports.

This kind of stock market performance from old economy companies in the business of freight is a positive signal and an indicator for the broader market. (See “My Favorite Picks for After the Market Corrects.”)

If I had to pick one market sector to watch as a general economic indicator, it would be the railroads. In terms of an index, it would be the Dow Jones Transportation Average.

Perhaps it is old-school to lend such weight to this index; it’s actually older than the Dow Jones Industrial Average, created by Charles Dow in 1884. In its first form, the index comprised nine railroad companies and two non-railroad companies (Pacific Mail Steamship and Western Union).

But I still believe it’s really important how business conditions are at the companies that take what other companies make. With the current strong leadership of the Dow Jones Transportation Average, the positive stock market trend remains intact.