Transportation ETFs In Danger of Technical Breakdown

The transportation sector is one area of the stock market that is closely watched as a gauge of global economic strength.  Many of the stocks in this group are subject to cyclical forces that include oil prices, consumer spending, capital goods orders, and other exogenous factors. 

More recently, the rebound in crude oil prices has been a headwind for the airline, trucking, and railroad companies that make up the iShares Transportation Average ETF (IYT).  After all, energy costs are a significant component of profit margins in the transportation business and investors are keenly aware of this correlation. 

This ETF has over $1.1 billion dedicated to 20 large-cap stocks in the global transportation and logistics game.  That includes top holdings in FedEx Corp (FDX), United Parcel Service (UPS) and Union Pacific Corp (UNP). 

So far this year, IYT has slipped more than 6 percent and is sitting at critical support near its prior 2015 lows established in April.  It’s also worth noting that IYT is now back below both its 50 and 200-day moving averages, which means momentum in this sector is slowly bleeding lower.

Another top fund that tracks this industry is the SPDR S&P Transportation ETF (XTN).  This ETF tracks a broader subset of 50 companies through a modified equal weighted index that levels the playing field for each underlying holding. 

The net effect is a greater impact in performance from smaller companies in XTN versus the market-cap weighted IYT.   XTN has shown a similar pattern of weakness and provided confirmation that the losses aren’t just limited to one standalone transportation index.

Airline stocks in particular have experienced significant volatility this week.  The newly released U.S. Global Jets ETF (JETS), which tracks 30 global airline stocks, fell more than 4 percent intra-day on Wednesday.  Recent comments on growth from the CFO of Soutwest Airlines (LUV) appeared to spook the industry. 

Overall, these transportation ETFs are showing a noticeable divergence in momentum versus major market indices such as the SPDR Dow Jones Industrial Average ETF (DIA), which recently touched new all-time highs.  Whether this is a period of short-term turbulence or the makings of a new slowdown is still to be determined.