Stocks Flash ‘Caution’ as Bellwether ETF Loses Most Since 2012

(Bloomberg) -- Transportation stocks are sending cautionary signals, and exchange-traded fund investors are taking note.

Investors pulled $108 million from the iShares Transportation Average ETF, ticker IYT, on Monday -- the most for any single day in seven years. The outflows came as the ETF’s underlying index, the Dow Jones Transportation Average, continued its downward spiral, punching through 50-, 100-, and 200-day moving averages.

“The heavy trade in transports remains one of the most under-reported and significant caution signs for the broader stock market right now,” Tom Essaye, a former Merrill Lynch trader who founded “The Sevens Report” newsletter, wrote to clients Tuesday. “Especially because the most recent weakness has been driven by bad earnings, profit warnings and lowered guidance.”

Stocks Flash ‘Caution’ as Bellwether ETF Loses Most Since 2012

Take FedEx Corp., for example, which makes up 10 percent of IYT. The shipping company has fallen about 30 percent over the last year, and new hurdles are arising. The company cut its earnings outlook last week, citing cooling global demand amid the U.S.-China trade war and Brexit uncertainty.

The underperformance of transportation stocks is notable, especially for believers in the century-old Dow Theory, which purports that moves in industrial and transport stocks must be confirmed by one another to be sustained. The Dow Jones Transportation Average is down more than 3.5 percent this month and has underperformed the Dow Jones Industrial Average five of the last six weeks.

There is a silver lining amid the warning signal. The transportation index rebounded 0.7 percent Tuesday, while the industrials climbed 0.9 percent.

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