“Bobbi-Jean, You Take That Mask Off Now!” (IYT,XPO,DIA)
It always struck us as interesting that this whole FBI/Dept. of Justice/Russian meddling story began with something the G-men call ‘unmasking’, a process whereby American citizens’ identities and affairs are exposed during a broad intelligence sweep that targets foreign nationals.
Normally these people and their privacy would be protected. Unless, of course, permission is granted from a higher authority to reveal their names.
There are also periods during which all the masks come off. And if we’re fortunate, this could be one of them. Call it the midnight hour, the post-ball tolling of the bell, the point at which the pumpkin truth is reinstated and all the poor and unadulterated dirty laundry is revealed for what it is.
Wouldn’t that be nice?
Too Many Secrets
We’ve a hunch that pretty much all of Washington’s official secrecy exists only for the benefit of those who actually stamp ‘secret’ on the files. But it doesn’t have to be. In fact, we’d all greatly benefit from a dose of daylight in our public affairs.
That said, the markets, too, would benefit from a good whack of truth, and we’re going to contribute to that process by revealing that the latest push higher on the indexes is about to come to an end. There’s a persistently weak underlying technical condition that has to be remedied before the next phase of the bull begins.
But before we get to that, we have a single trade to close.
It was opened just two weeks ago, on the 15th of February, in a letter called That’s Some Horse! In that missive, we urged you to buy the SPDR Dow Jones Industrial Average ETF (DIA) March 16th 252 CALL for $3.05 and sell the DIA March 16th 244 PUT for $3.10. Total credit on the affair was $0.05.
Oue feeling was that the market would, indeed, bounce. But now that the move appears to have concluded, we see no reason to draw things out.
Today, the CALL trades at a fat $4.60 and the PUT for $1.17. Sell the former and buy back the latter and you take home $3.48 on absolutely nothing laid out. Adjusted for minimal commissions gives you a take of 2220% in a fruitful fortnight.
It was from the transport sector that we got the most recent conformation that the current rally had weak legs. There were both breadth and volume issues coming into the week, and overhead selling hit the broad market strongly over the last few days.
But yesterday, both the S&P 500 and the transports sported a telltale bearish engulfing pattern, a Japanese candle formation that generally spells the end of a bullish run for a security. The fact that it appeared on two discrete indexes, albeit related, infuses the both with additional validity.
We look at the transports first.
This is the Dow Jones Transportation Index for the last half year. And it makes clear that the overwhelming body of technical evidence is now pointing toward a retreat for the sector.
First, the overall bounce for the trannies was much weaker than the broad market’s, pulling higher some 10% from the trough through yesterday’s retracement high – on weaker than average volume (in black) – while the S&P 500 and NASDAQ rose on the order of 12/13%.
But more than that, MACD is still underwater, and RSI has now failed in its bid to surface above its midway waterline (in green), leaving the trannies with a clear bearish technical bearing.
Finally, the aforementioned bearish engulfing pattern, enlarged in blue, shows that we’ve almost certainly reached the top for the move.
The next act for the transports should bring them back toward the 137 day moving average at 10,000 for a retest of support.
One Company Bucks the Trend
Among the transport names that sport bearish engulfing patterns include logistics leaders FedEx and UPS, the latter of which has an absolutely abysmal chart.
But one transporter has managed to grow its business without interruption through the entire selling episode of early February and even managed to post an all-time high just yesterday while everyone else was struggling.
The firm is called XPO Logisitics (NYSE:XPO), a diversified shipping leader with a market cap of just $11.7 billion that looks to be headed for a very bright future.
What sets the company apart from giants like UPS and FEDEX is, among other things, its focus on larger consumer durable deliveries, leading to its dominant position in those segments called ‘Less Than Truckload’ (LTL) and ‘Last Mile Logistics’ services.
As the online ordering trend broadens to include refrigerators, stoves and washing machines, companies like XPO have done a fantastic business.
A look at the following chart that compares XPO with the rest of the transport sector, as represented by the iShares Transportation Average ETF (NYSE:IYT), shows just how much growth we’re talking about.
Unbelievable. From the start of 2016 the company’s shares have returned 270%, against 45% for the broad transport sector.
And it’s precisely that outperformance, and the company’s ability to ramp up its growth at a tremendous rate, that has led retail giant Home Depot to look into acquiring the company. Amazon also does a tremendous business with XPO, and as their consumer durable sales accelerate, they, too, will be looking to acquire a transportation business on the scale of XPO.
What makes the company even more interesting to investors today is that its long running European business has led to it being misclassified as a freight brokerage rather than a complete corporate delivery concern along the lines of UPS and FedEx.
It shouldn’t be too long before the mask comes off, though. XPO is fast becoming one of the most popular holdings of U.S. hedge funds, and the chart above provides ample evidence why.
We are betting on the continued outperformance of XPO over the broad transportation index. And we’re doing it as follows –- Content protected for Normandy Executive Lounge, Option Trader Elite, Executive Lounge members only]
Many happy returns,