Checking in on the Trannies

No, not those trannies!  Get your mind out of the gutter!

Today we’re going to look at the Dow Jones Transportation Average and talk about why it matters.

I must confess that I frequently lose track of what’s happening with the Transports or “Trannies” from time to time, but when we see new 52 week highs printed for the Dow Jones Industrial Average, I force myself to take a look at whether or not the DJ Transports are also printing a new high for reasons I’ll get into below.

Before I continue, please do not construe this post as research, advice, religious indoctrination etc.

OK, so for starters, what is the DJ Transport Average? 

It is an index made up of airlines, shippers, railroads and truckers.  Unlike its more popular cousin the Industrial Average, which has 30 component stocks, the Transport Average has only 20.

Shortly after creating the Industrial Average back in 1896, Charles Dow built the Transports as a measure of the flow of goods and shipping activity.  Originally, the index had 18 railroad stocks in it.  Airlines and stuff were added later, of course.

How does the Transportation Average work?

The stocks that make up the Transport Average are price weighted just like the Dow 30.  This means that the higher the price of the stock, the more it matters or the higher its “weight”.  For this reason, stocks like Fedex (FDX), Burlington Northern (BNI), UPS (UPS) and CH Robinson Worldwide (CHRW) are a lot more important for the performance of the index than dwarf stocks like JetBlue (JBLU) and Southwest Airlines (LUV).

Like the Dow 30, the Trannies kick out components and add new ones from time to time.  For example, YRC Trucking (YRCW), a company that, poetically speaking, resembles a jack-knifing 18 wheeler colliding with a bridge embankment, was removed on December 11th.  It was replaced by Delta Airlines (DAL), which was itself removed back in 2005 during its latest Chapter 11 restructuring.  Airlines are crazy like that.

So do the Trannies matter? 

Well, that would depend on whether or not you are an adherent of Dow Theory. 

The basic premise of Dow Theory is that the Trannies need to stay strong while the Dow Industrials are strong as a form of “confirmation”, especially when new highs are being recorded.  The theory being that the industrials that are making the goods need to have the transportation companies shipping them as proof of a humming economy.  When there is divergence between the industrials and trannies in terms of direction, traders who believe in Dow Theory begin looking for the exits.

How are the Trannies doing?

I resent the implications of your question, I have no contact with Trannies whatsoever.  Just kidding.  The Dow Transports have had a monster year and they have in fact confirmed last week’s 52 week highs for the Industrials, in case you believe in Dow Theory.

Currently, the DJ Transports are at around 4174, a double from the year low which was 2100.  I am once again keeping an eye on this average.  I should also note that it will be interesting to see how they replace BNI in the index as it will be removed upon the close of Berkshire Hathaway‘s acquisition.