Watch Transportation Stocks for Market Direction

By Joyce Yu

Philadelphia, PA–Investors may be wondering what to make of the recent rally as Wall Street was watching the S&P 500 hit record high for the first time in six months. Analysts said the Dow Jones Industrial Average need to break to new highs to give the market a confirmation. It will be positive if the transportation index is able to march to new highs given its sensitivity to the economy.

While the Dow companies are catching up, the next leg higher for the transports should come from the airline stocks, according to Matt Maley, equity strategist at Miller Tabak. He told CNBC that, “The airline stocks actually saw a correction in the first half of the year and now they’re bouncing back so they have some upside potential here.”

“If they can break above their highs from just a few months ago, it will give it a key higher high and give it a lot more upside momentum, and that in turn could take the rest of the sector higher.”

As of late June, the XAL airlines index lost 22% from its peak in mid-January, but broke higher over the past seven weeks. Some analysts, however, pointed out not only economic growth but several factors will affect prices of airlines stocks. Gina Sanchez, CEO of Chantico Global, said, “They’re very sensitive to jet fuel prices, and so if you have oil prices falling, that’s a great thing. That makes airlines significantly more profitable.”

Transportation index is a leading indicator of the state of the economy. The Dow Theory suggests that the stock market is on the rising trend when the Dow transportation average and the Dow industrial average make new highs, either at the same time or shortly after one another. The theoretical explanation is that in an economy, transports deliver what industrial companies produce, and so one index will corelate with each other.  As of Tuesday, the Dow transportation index broke previous high for the first time since mid-January.

Separately, Target’s stellar Q2 earnings is the latest evidence that the US economic is doing well. Beating market estimates in on earnings, revenue and comparable store sales, Target raised its earnings outlook for the full year. The big-box retailer’s digital sales skyrocketed more than 40% during the second quarter, although 90% of retail sales are done in physical stores.

Target CEO Brian Cornell told analysts, “There’s no doubt that, like others, we’re currently benefiting from a very strong consumer environment — perhaps the strongest I’ve seen in my career.”