Friday, April 4, 2008

Are Transports Signaling a Rebound?

The Transportation average is a very important market. When the economy is expanding we need to ship more and more stiff from point A to point B. When the economy is slowing we ship less stuff from point A to point B. The transports should response to these events by rising and falling.

Let's look at the averages to see what's going on.

The is a chart that originally led me to concern about the overall health of the markets. Notice the transports broke the long-term trend line last year, but have since risen to that line again.

A key will be what happens when prices hit the line. A move through will indicate strength while a move away (bouncing off of) will indicate weakness.

This is a closer look at the one year chart, which gives us a better idea where prices are in relation to the long term trend line.

Here's another interesting point: Notice the head and shoulders reversal pattern and the fact that prices have moved from this pattern to a higher point.

On the simple moving average chart, notice the following:

-- The 10 day SMA is above the 20, which is above the 50 -- a bullish orientation.

-- The 10, 20 and 50 day SMAs are all moving higher.

-- Prices have crossed the 200 day SMA

-- Prices are above all the SMAs

-- The main drawback to this rally is the lack of volume. Note the 10 day SMA of volume hasn't risen significantly.

OBV is up a bit, and

The Chaikin Money Flow has a nice spike.

So, a majority of the technicals are bullish with the exception of volume. And the underlying story to volume is it's a mixed bag. And then there are stories like this:

Struggling to cope with record oil prices and a weakening economy, Northwest Airlines Corp. said it will raise fares, fuel surcharges and baggage fees and cut its domestic flight schedule by 5%.

The move is the latest by a major carrier to trim service and pile extra fees on customers as relentless growth in the cost of fuel threatens the industry's attempt to put a half-decade slump and a round of bankruptcies behind it.

Northwest also said it has suspended plans to hire more pilots and flight attendants and will cut capital spending that doesn't involve airlines by about $100 million this year, to $150 million. Employees' pay won't be cut, and any job losses will happen through attrition if possible.

"Over the past several months, the price of oil has risen dramatically to all-time highs and there is no reasonable basis to conclude that oil prices will materially decline anytime soon," Chief Executive Doug Steenland said. "These increased costs are significant and call for a strong response from us."


This week, three airlines have announced they would close: ATA Airlines Inc., Aloha Airgroup Inc. and Champion Air.

My guess is there are two inter-related thoughts here.

1.) Transport companies are increasing prices faster than their fuel surcharges. This will increase profits.

2.) The bankruptcies are increasing pricing power of the remaining companies.

I think there is also continued hope for a merger in the major airlines.

Finally, we've seen a stronger government response over the last month or so. The Federal Reserve has provided a back-stop to the investment banking community with their aid on the Bear Stearns deal. We're also seeing Congress more involved as well. Both of these factors could help to mitigate the downside pain from a slowdown.

The big issue is a rally above the previous long-term support line. And remember the move through that doesn't have to happen on the first time. So keep your eyes open.