Transportation ETFs: Grounded Or Ready To Take Flight?

The widely followed Dow Jones Transportation Average entered Wednesday with a year-to-date gain of 12.41 percent, but the bull thesis for transportation stocks was dealt a blow when shares of FedEx Corporation FDX slid after the freight and logistics company cut its full-year earnings per share guidance to $15.10 to $15.90, below the consensus estimate of $15.97 a share.

FedEx is the largest component in the Dow Jones Transportation Average at a weight of almost 10.70 percent.

What Happened

While the decline in FedEx shares is an obvious near-term headwind for the Dow Jones Transportation Average, risk-tolerant traders can position for a rebound in the transports with the Direxion Daily Transportation Bull 3X Shares TPOR. That leveraged exchange-traded fund (ETF) attempts to deliver triple the daily returns of the Dow Jones Transportation Average.

Beyond the aforementioned slide in FedEx shares, transports have dealt with other headwinds this year, including ongoing US/China trade tensions and the recent groundings of Boeing Co.'s BA 737 MAX aircraft.

“With the persistence of the U.S.-China Trade war, declining spending among domestic consumers and the recent grounding of the Boeing 737 MAX aircraft due to safety concerns, investors’ minds might not immediately leap to the transportation industry as the strongest growth candidate for the year,” said Direxion in a recent note. “And yet, domestic transport companies have maintained their momentum so far this year. Cheaper oil and a buy-the-dip market mentality have helped push some companies in the sector to a new 52-week high.”

Why It's Important

TPOR is nearly two years old, but market observers' affinity for using transports as a gauge of broader market health spans decades, if not longer. As highlighted by a year-to-date gain of nearly 37 percent, TPOR is doing an admirable job of delivering triple the daily returns of its underlying index.

This year, transports have been boosted by bullishness in railroad operators. Road and railroad firms account for almost 47 percent of the Dow Jones Transportation Average.

“Earnings-wise, all of these companies reported solid bottom-line numbers in the previous quarter, meeting or surpassing analyst expectations and showing healthy year-over-year growth,” said Direxion. “Landstar, in particular, posted an impressive 65 percent annual EPS growth throughout FY2018.”

What's Next

It appears some traders are taking profits in TPOR. For the 10 days ended Tuesday, March 19^th, outflows from TPOR equaled 32.40 percent of the fund's assets under management, according to issuer data. If the transports renew their recent rally, TPOR's outflows could reverse to inflows.

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