The debate over whether oil prices have climbed enough to hurt the economy may continue, but a breakdown in the transportation sector indicates they may have already risen enough to facilitate a broader stock-market correction.
It would seem like a no-brainer that rising oil prices are bad for transportation companies, which then directly face an increase in the cost of running their businesses. But for most of the past decade, oil prices and the Dow Jones Transportation Average /quotes/comstock/10w!i:djt (DJT 5,111, +123.44, +2.47%) have generally trended in the same direction, as both were guided more by the direction of economic growth.
Because the economy continues to show signs of improving, Deutsche Bank analyst Justin Yagerman said his bullish stance on the transport sector remains intact.
Nevertheless, he acknowledged that the group hasn’t acted well recently, and he believes “investor scrutiny has been justified” because of the potential for oil to temper expectations for economic growth. If enough investors believe in that potential, a simple pullback in the transports can quickly develop into a full-blown correction. And that can’t be good for their industrial counterpart.
The Dow transports fell below the Jan. 28 low of 4,967 in intraday trading twice last week, but closed below that level for the first time Tuesday. That doesn’t mean the uptrend is over, because more than just one lower low is needed to confirm a new downtrend.
But it does mean there should now be significant resistance within the 5,000-to-5,100 range. That’s where the index was consolidating on the downside in late January and early February, while the Dow Jones Industrial Average /quotes/comstock/10w!i:dji/delayed (DJIA 12,258, +191.40, +1.59%) was still reaching for new multiyear highs.
The composition of the transports index has changed significantly since Dow Theory first said it should move in tandem with the Dow Jones Industrial Average about a century ago, but the idea remains the same. The transports track the sector of the economy that moves the goods that are made by the industrials sector.
It would seem like a no-brainer that rising oil prices are bad for transportation companies, which then directly face an increase in the cost of running their businesses. But for most of the past decade, oil prices and the Dow Jones Transportation Average /quotes/comstock/10w!i:djt (DJT 5,111, +123.44, +2.47%) have generally trended in the same direction, as both were guided more by the direction of economic growth.
Nevertheless, he acknowledged that the group hasn’t acted well recently, and he believes “investor scrutiny has been justified” because of the potential for oil to temper expectations for economic growth. If enough investors believe in that potential, a simple pullback in the transports can quickly develop into a full-blown correction. And that can’t be good for their industrial counterpart.
The Dow transports fell below the Jan. 28 low of 4,967 in intraday trading twice last week, but closed below that level for the first time Tuesday. That doesn’t mean the uptrend is over, because more than just one lower low is needed to confirm a new downtrend.
But it does mean there should now be significant resistance within the 5,000-to-5,100 range. That’s where the index was consolidating on the downside in late January and early February, while the Dow Jones Industrial Average /quotes/comstock/10w!i:dji/delayed (DJIA 12,258, +191.40, +1.59%) was still reaching for new multiyear highs.
The composition of the transports index has changed significantly since Dow Theory first said it should move in tandem with the Dow Jones Industrial Average about a century ago, but the idea remains the same. The transports track the sector of the economy that moves the goods that are made by the industrials sector.
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