Dow Jones Transports Showing Life Again; Will the Stock Market Follow?

 stock marketThe Dow Jones Transportation Average is sneaking back upwards. It’s been in consolidation since mid-May, but now it’s holding firm at what is basically an all-time record high.

Over the last 15 years, this index has been extremely volatile, but not uncharacteristically over the very long term.

Adhering to the old Dow theory, I still believe that the Dow Jones Transportation Average is both a leading stock market indicator and a confirming index regarding business conditions. Many stocks within the index are trading close to their all-time record highs.

Looking at many component companies of the Dow Jones Transportation Average, I see stock market leadership and trading action representative of the broader market, but in advance of its performance. Stock market speculation on economic renewal is real and without subterfuge. It is the long-run speculative ebb and flow of the equity market.

Returning to the performance of the Dow Jones Transportation Average, if it breaks out above 6,600 then there is a real chance it will push its most recent record high, which it set in the beginning of August.

Within the index, components such as Delta Air Lines, Inc. (DAL) and Alaska Air Group, Inc. (ALK) have been on a roll lately. Part of it (like everything else in the stock market) has been due to the monetary expansion fostered by the Federal Reserve. But it’s not the whole story. These corporations are reporting improved business conditions.

Alaska Air Group was a Dow Jones dud for decades until 2010. The company’s been a stock market darling ever since

The company’s second-quarter revenues didn’t even grow that much, rising to $1.26 billion from $1.21 billion comparatively. But like so many other corporations who’ve been able to increase prices without affecting demand, the bottom line has been expanding.

Alaska Air Group’s second-quarter earnings were $104 million, or $1.47 per diluted share, way up from comparable earnings of $68.0 million, or $0.93 per diluted share. And that’s why this Dow Jones transportation component has been so hot recently—its earnings, not its top-line growth. (A big part of the company’s earnings performance was the successful hedging of fuel costs.)

And this is a story so reminiscent of many stock market benchmarks. Top-line growth is modest at best, but earnings only meet Wall Street consensus based on productivity, price inflation, and financial engineering tactics—not because of newly originated robust demand.

But among many corporations and components of the Dow Jones Transportation Average, balance sheets are strong. And while the stock market bets on earnings, this trend is helpful in the long run. (See “My Suggestion on Reducing Stress with This Stock Market.”)

I watch the Dow Jones Transportation Average with fervor, and even though it may be seen as “old-school,” I see its trading action as a leading indicator, both for the stock market and the U.S. economy.

Recognizing that the stock market can’t, of course, rally without the participation of other indices, component companies of the Dow Jones Transportation Average are old economy benchmarks, and these businesses still very much account for a big part of the U.S. economy.