Transports Weaken, a Caution Signal

The transport sector, which is one sector we can watch to gain insight on the direction of the economy, is showing signs of hesitation. This post is quick focus on the long trend for the transportation sector.

The following chart is the relative performance of the transportation ETF (XTN) against the S&P 500 Guggenheim Equal Weight ETF (RSP). This is a weekly chart, I like long term charts as they give us a better idea of which way the river is flowing.

The first observation we can make is the direction of this ratio – a falling ratio suggests a weakening economy and a rising one suggests a strengthening economy. The transportation sector is closely tied to the commodity and industrial sector and is thus one gauge on the economy’s health. We can see that following the US election the transportation sector surged. This is not surprising given the inflation trade theme unleashed by Trump. However, by the start of the new year it quickly lost steam.

To see if we can garner any other signals from this chart I have removed the actual ratio and simply plotted the 5 day (pink line) against the 52 day (blue line) exponential moving average. It is clear these moving averages are about to generate a bearish crossover, suggesting the trend is bearish. We should therefore watch over the coming months to see if this signal holds or not.

Given that retail and homebuilders (key components of the economy) are weak also supports the caution ahead signal being generated by transports.

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