Talking Numbers

This critical indicator could be giving stocks the green light

This critical indicator could be giving stocks the green light

Transportation stocks have been in the fast lane.

The Dow Jones Transportation Average is up nearly 6 percent from last week's lows and is 5 percent away from reclaiming its all-time highs set a month ago.

Many market participants consider the "transports" to be an important indicator for the rest of the market because they are believed to signal the future growth prospects for the Dow Jones Industrial Average. After all, goods travel by road, water, rails, or air to get to consumers—so an uptick in those companies is thought to be a good sign for the economy.

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But the technicals are also showing something else, according to technical strategist Richard Ross, a "Talking Numbers" contributor. He sees a megaphone-shaped "broadening top" forming in the short-term charts of the Dow Jones Transportation Average.

"It is formed by a pattern of higher highs, but also lower lows on the downside," he said. "That's telling us volatility is increasing. That's often what we see as this band expands near the top of a very nice run."

Looking at a longer-term chart of the transports, Ross sees the implications of the broadening top. "If the megaphone top is right and we are broadening out here, distribution is occurring—selling is occurring," he said.

Ross believes that could lead to a retest of the 50-week moving average at around 7,800. And if that support fails to hold, "you're going to see a steeper, more sinister decline," he warned.

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However, Erin Gibbs, equity chief investment officer at S&P Capital IQ Global Markets Intelligence, is more optimistic than Ross. She thinks the transports took too much of a hit due to worries about the Ebola virus.

"I'm very positive on the transports," said Gibbs, who is responsible for over $13 billion in assets under advisory. She notes the Dow Transportation Average is currently trading at about 15.8 times its expected earnings over the next 12-months, slightly below its one-year average multiple of 16.1 and its 10-year average multiple of 16.2. On top of that, its expected earnings growth rate is 14.3 percent, well above the 9.4 percent expected for the broader S&P 500 index.

That indicates to Gibbs that the transports are now a bargain.

"For me, this is the equivalent of a Jimmy Choo sample sale," said Gibbs. "Get them while you can."

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