Market theory says that transportation stocks do well in the early stages of an economic recovery, but recent break of our intermediate-term trend may give us some insight that the road to a recovering economy is going to have some potholes along the way. While the longer-term trend for this index is still upward trending, last weeks rally came right up under the intermediate- term trend and that equates to a major roadblock for any further advance.
Dow Jones Transportation Average - last eleven months
Back in October at the fall OptionInvestor.com expo, I thought the transports might be a good place for investors to be focusing should the economy begin a recovery. Amazingly these stocks really surged in the following weeks. Recent action though tells me that many market participants must be thinking that there will be some bumps in the road. I derive this thought as oil prices have begun to fall, but the group isn't responding to the lower prices. The only other component I can come up with is the state of the economy going forward and what the market thinks of the near-term future. Market bulls that believe in the theory that the transports usually lead in a stronger economic environment will want to see this index get back above its intermediate term trend.
Oil stocks in for a slippery slide?
A reader sent in a comment that Amerada Hess looks like it could be a good short candidate. Could it be that Oil stocks, once a bastion of safety in an otherwise turbulent market, are not longer a safe bet? Lets start by seeing what the bullish percent is telling us about this sector.
S&P Energy Sector Bullish Percent Chart
Bullish percent charts measure the number of stocks in a sector that are trading with a buy signal on their point and figure chart. Readings above 70 are generally considered overbought, and readings below 30 are considered oversold. As we can see from the above chart, the S&P Energy Index has been living in overbought territory for most of this year. When the index did drop below overbought territory, it never dropped completely into oversold territory, and never stayed there for long. That could all be changing now that the index has dropped to a reading of 28 for the first time in a year and a half. But a reading of 28 is oversold, and signals that the risk of shorting these stocks is high. What could play out is the same scenario that happened in December of 2000 (point #1 on the above chart). The index came close to oversold territory, and tried to rebound. Rather than quickly rebounding like it did in 2001, the index continued to languish near oversold territory with only weak rally attempts. So what does this mean for individual stocks? I could mean a short-term rally that gets the index out of oversold levels, but then fails as stocks head lower.
Amerada Hess Daily Chart
Amerada Hess (NYSE:AHC) gained a solid 50% in the first half of 2001, all the while staying contained in its regression channel and above the 50-day moving average, but that all came to and end last week. Amerada is now desperately fighting to climb back above the trend, but the lower boundary of the regression channel and the 50-day moving average are now acting as resistance. To flash a buy signal on the point and figure chart, and increase the bullish percent by one point, AHC would have to trade $88. That looks like a tough task. Most likely Amerada will have trouble getting above $85, and then reverse back down. So in the short-term AHC could try to rally, but over the long-term it could fall and test support at $80, or if that support level is lost, it could be a slippery slide to $74. Either way, this oil stock doesn't look like the nice safe bullish play it once was.