Wednesday, April 9, 2008

Why Transports Matter

From Marketwatch:

United Parcel Service Inc. cut its first-quarter earnings range, surprising analysts, as the delivery giant got chilled by the same bitter economic headwinds affecting everything from airlines and automakers to banks and retailers.

The profit warning appears to be weighing on financial markets in early action on Wednesday, with S&P 500 futures down 6.8 points to 1,364.20 and Nasdaq 100 futures off 5.75 points to 1,849. Dow industrial futures fell 46 points. See Indications.

UPS shares fell 3% to $71.15 in pre-market trades.

After the closing bell on Tuesday, the Atlanta-based package transport firm said it now expects a profit of 86 cents to 87 cents a share, down from a range of 94 cents to 98 cents a share. Analysts polled by FactSet Research previously had targeted earnings, on average, of 93 cents a share.

"The U.S. economy has continued to weaken, causing a reduction in domestic package volume and a shift away from premium products. Significantly increased fuel costs in the quarter also contributed to the lower than expected results," UPS said in a statement.

A good report from a transportation company indicates the economy is doing well. The converse is also true.

Last week I wrote an article titled, "Are Transports Signaling a Rebound? I made the following points:

-- The technicals were improving,

-- There was continued chatter about consolidation in the airline industry.

An astute reader pointed about that airlines represent a small portion of the IYT's and therefore the stories linked to them aren't as important for this particular index. This was a very good observation.

I concluded that the real issue for the transport index would be crossing a long-term support line started in early 2004:

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.

Here's a chart of the IYTs

Notice the following:

-- The index rallied from a head and shoulders formation

-- Prices are higher than the 200 day SMA

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

-- The 10 and 20 day SMA moved through the 200 day SMA, and the 50 is getting ready to

-- The 10 SMA is higher than the 20 SMA which is higher than the 50 day SMA -- a bullish configuration

-- But, volume has been decreasing as the market is moving higher, indicating a lack of interest on the part of buyers.

Again -- the big issue is getting about the long-term support line. That will be the best tell this market can give us.