While the S&P 500 has weathered the seemingly endless chop-fest of 2015 with uptrend intact, some sectors on Wall Street haven’t been so fortunate.
Weakness in areas like utilities and REITs — think the Utilities Select SPDR Fund (NYASEARCA:XLU) and iShares Dow Jones US Real Estate (ETF) (NYSEARCA:IYR) — has been understandable. Nothing takes the wind out of the sails of these classic bond proxies like the sharp uptick recently seen in interest rates.
The selling pressure in transport stocks, on the other hand, is a bit more interesting. While the Dow Jones Industrial Average remains ever so slightly below its all-time high, the Dow Jones Transportation Average is on the verge of breaching a major long-term support level.
Normally the correlation between these fast friends is quite positive. Recently, however, the two Dow Averages have moved apart.
The recent divergence along with declining correlation is shown in the following chart.
With this week’s downturn the DJTA is testing the 8,550 support for the seventh time this year. Any more selling pressure and this key line in the sand will give way resulting in a reversal of the Dow Transports long-term uptrend.
Those looking to profit from the continued demise in transportation stocks can use the iShares Dow Jones Transportation Average ETF (NYSEARCA:IYT) as a proxy.
A break below the $152.50 support zone would confirm the DJTA is breaching the aforementioned 8,550 support zone give bears a green light for new positions.
IYT Put Spread
Consider buying a Jun $155/$150 put spread for $1.90 to capitalize on further weakness in IYT.
The maximum risk is limited to the initial $1.90 debit and will be lost if the IYT ETF sits above $155 by expiration.
The maximum reward is limited to the distance between strikes minus the net debit, or $3.10, and will be captured if IYT can fall below $150.
At the time of this writing, Tyler Craig owned bearish trades of Norfolk Southern Corp. (NYSE:NSC).
