UPS could see its worst December on record. Buy these two transport stocks instead, says strategist

Transports are getting wrecked.

After posting its worst week since August 2011, the Dow Jones Transportation Average fell again on Monday. The index is now down nearly 9 percent just this month, but one top strategist said the move lower isn't flashing a sell signal for the broader market just yet.

The Dow Jones Transportation Average is widely followed because its components are considered the backbone of the economy. If these stocks — primarily airlines, shipping and trucking names — are performing well, then the consumer and the broader economy must be in good shape. Market technicians also watch the transports closely since it's part of the so-called Dow Theory, which in simplest terms means that any buy or sell signal must be confirmed by tandem movement for both the Dow industrials and the Dow transports.

Both averages are now in correction territory — down more than 10 percent from their 52-week highs — but Ari Wald, head of technical analysis at Oppenheimer, said this isn't a sell signal just yet.

"To get a sell signal you need both the industrials and the transports to break below their Q1 lows," he said on Monday's "Trading Nation." "The transports have broken down below that Q1 level, but you don't get a sell signal as long as the Dow industrials are above 23,533. So not yet a bear market by Dow Theory definition."

That said, he believes some of the components in the index are sells at current levels — especially UPS. The shipping giant is on pace for its worst December on record, and Wald believes the pain is set to continue.

"Stay away from UPS. It broke a seven-year uptrend today," he noted, also pointing out that even while in the uptrend it was an underperformer relative to the rise in the broader market. "[UPS] is breaking down, and it's leading the market lower ... overall poor risk/reward, sell UPS," he said.

Competitor FedEx was also in the red during Monday's session, falling to a 19-month low after Bank of America cut the stock to neutral on management shake-up concerns.

Like Wald, S&P Investment Advisory Services Equity Chief Investment Officer Erin Gibbs believes investors should stay away from shipping companies since they're facing margin compression. But she does believe there's value to be found in the broader transportation space. She likes the airlines, and is specifically watching Delta and Alaska Air.

"When you look at the growth rates for next year, airlines have an expected earnings growth rate of about 20 percent, which is double the overall transport expectations," she said.

In the past three months shares of Delta have fallen more than 2 percent, while shares of Alaska Air are down nearly 7 percent. By comparison, the transportation index is down more than 14 percent.

"Airlines are still doing well. There's still global growth, and that's one area we do find safe," she added.


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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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