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Why FedEx Profit Warning May Be Bad Sign for Stocks

Wednesday, 5 Sep 2012 | 2:21 PM ET

Warning bells from FedEx and UPS could be sending important Dow Theory signals that the summer-long rally is under threat.

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The two transportation majors recently have issued warnings that more difficult times likely are ahead for the companies due to the global economic slowdown.

Dow Jones transport stocks, subsequently, have continued a weak performance that has caused the index to lag the more widely followed Dow industrials, a trouble sign to those who believe the two indexes need to move relatively in tandem to confirm a rally.

"The last important signal under Dow Theory came in February when both reached significant new highs. Since then, the transports have not confirmed," says Richard Moroney, editor and vice president at Dow Theory Forecasts. "The central rule of Dow Theory is both averages must confirm. Nothing has changed in terms of the primary trend unless both averages confirm."

That means the stock marketrally stands on precarious ground, though there are no definitive signs that the averages are breaking toward a bearish trend, either.

But the danger signs for Dow Theorists remain.

Another principle tenet of the theory, advanced more than a century ago by Charles Dow, is that volume must confirm rallies — that a thinly traded move upward is suspect. Volume has hit a series of 2012 lows in recent weeks and has remained anemic in the two trading days thus far in September.

The theory also watches various top and bottom points to determine when new highs and new lows are made, then observes when those trendlines are broken to determine market movement.

Moroney said the next upside target on the Dow industrials is 13,279.32, while for the transports it is 5,368.93, which represent the 2012 highs.

Downside targets are the early June lows of 12,101.46 for the industrials and 4,847.43 for the transports.

FedEx has fallen 2.4 percent over the past 30 days while UPS is off 2.6 percent, pushing the transports to a 9 percent loss during the period and gains of just 1.7 percent since the June lows.

FedEx earnings will miss earlier estimates of $1.45 to $1.60 a share, a condition the company said Tuesday was due to a weakening global economy that was hurting revenue. Profit at UPS rose just 2.2 percent, and the company likewise cut its year-end view.

Both moves sent signals that the Dow transports could continue to be under substantial pressure. The index was vastly underperforming its peers in Wednesday trading.

"There's nothing that says you need to wait for the right bear market signal to adjust your portfolio," Moroney says. "You certainly have to be a little discouraged that the transports haven't been able to reach a new high. Now you've got some fundamental news explaining some of that underperformance."

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Indeed, another Dow watcher believes the negative technical signals coupled with global economic signals are sending a market warning.

"One could make the case that you might be looking at some market turbulence going forward," says T. Doug Dale, CEO at Security Ballew Wealth Management in Jackson, Miss. "What's going on in the world is too much debt. You can't just keep printing more money and absorbing that debt. There's got to be a point where that doesn't work."

To be sure, not everyone who follows Dow Theory is convinced a "sell" signal is imminent.

Widely followed Dow theorist Jack Schannep, editor at The Dow Theory online newsletter, said "one has to be concerned" about the various signs but he believes the market is still in "buy" mode.

Schannep points out the transports are within 11.4 percent of their 2011 all-time highs while the industrials are within 7.7 percent of their 2007 records.

"Both can reach those highs if this economy keeps muddling through without a recession, a position which I continue to hold," he said in an email response. "My interpretation of the Dow Theory for the 21st Century is that it is in a buy mode (while) some other Dow theorists using the original Dow Theory as a guide see it as in a sell mode. Time will tell."

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