If you’re concerned about the broader market, look no further than select transport stocks and the iShares Dow Jones Transport. Avg. (ETF) (BATS:IYT). Then hop on board component stocks United Continental Holdings Inc (NYSE:UAL), CSX Corporation (NASDAQ:CSX) and Kirby Corporation (NYSE:KEX) as bearish transport. Oh, and do it all without one ounce of worry.
The SPDR Dow Jones Industrials Average ETF (NYSEARCA:DIA) and Dow Jones Transports both finished up fractionally Friday. But there’s evidence on the price charts that may be as good as it gets (and it could get a good deal worse for transport stocks).
Dow theory looks for the Dow Industrials and Dow Transports to confirm each other’s price trend. It makes sense enough as the manufacturer of goods requires those products to be shipped. As much, both sectors should prosper and falter in the same business cycle. So, when there’s divergence on the price chart, it’s generally taken as a heads-up.
That being the case and moving past the daily wiggle on the price chart, for nearly two months the two sector proxies have been diverging with transport stocks leading the way lower. The sector is off around 3.5% since topping at all-time-highs on July 14. At the same time, the DIA is up by about 1.0% after continuing to hit fresh highs into August.
Could this be a sign of greater and broader price declines ahead? With both sectors now showing lower highs and lows on their respective charts and the market firmly in a historically weak calendar period, this strategist is inclined to believe that’s increasingly likely.
Now and with the DIA sitting just above its 50-day simple moving average and IYT having only narrowly broken above the key institutional price line on weak volume; a fractional drop lower could prove to be a big deal technically. In fact, it could prove to be the straw that breaks the camel’s back.
Transport Stock #1: United Continental (UAL)
The airliner is now trading roughly 10% below its springtime public relations disaster. Whether UAL’s bearish price action is a result of investor fears over industry price wars, hurricanes, or maybe even geopolitical risks, I can’t say which or what combination of factors is responsible and to what degree.
What I can say and see on the UAL price chart is a transport stock that’s firmly in bear territory, has broken key support lines and isn’t so technically extended as to think the price decline is finished.
For traders that also see continued weakness ahead in this transport stock, a modified Dec $57.50/$52.50/$50 put butterfly for up to $1.35 looks attractive. As with a regular long butterfly, this bearish combination requires shares to move below $57.50 in order to start gaining intrinsic or real stock value.
Should UAL continue flying lower, the bearishly positioned combination can pay out as much as $3.65 if UAL stock landed at $52.50 on expiration. And if shares really get grounded, that’s not a problem either. Due to the varied width structure of the embedded verticals, unlike a regular butterfly, if UAL crashes below $50, the trader still profits by $1.15.
Transport Stock #2: CSX Corp (CSX)
The weaker outlook sounds alarming, but investors did more cheering than fearing following the report. As much the “buy the news” response can’t be entirely dismissed as the announcement may have been priced in.
Yet other obstacles favoring bearish positions in CSX still exist on the chart of this transport stock and may prove more important to investors looking to jump off and take profits. The daily chart of CSX shows bulls are facing a bearish flag pattern, 50-day simple moving average resistance and overbought stochastics. In conjunction with weak market seasonality and a healthy-sized rally of about 150% in less than two years from a corrective low, this transport stock’s modest rally is setting up to get derailed, technically.
Reviewing the CSX options board for ideas, I like climbing aboard bearishly with an Oct $49/$45 put spread for up to 55 cents. If shares of this transport stock stall and begin to falter, a bearish breakdown of the flag should provide nice momentum to make this position an easy double and perhaps even able to capture the full $3.45 if the market makes good on its historical tendencies.
If CSX bulls do break through resistance, however, the out-of-the-money combination is a less risky proposition on a per-dollar contract basis. And with the softer deltas, exiting for a smaller loss such as a 50% money stop is typically easier to execute.
Transport Stock #3: Kirby Corp (KEX)
Vessel oversupply and weakness in the energy market have been two contributing factors behind the price drop in KEX, but don’t think for a moment the worst is over for this transport stock.
Bottom line, with a fairly staunch 17% short float and a belief in the trend being your friend, you’re in good company building a short position as KEX trades in a steady downtrend stationed below 50-day simple moving average resistance.
Reviewing the KEX options board, one promising way to make the trend even friendlier is the Dec $60/$55 put spread. Priced for $1.40 with shares at $62.80, this bearish vertical offers traders a limited-risk position with plenty of time on the calendar for the transport stock to sink further underwater to new lows within its price channel and dredge up profits of up to $3.60.
Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits and feel free to click here to learn more about how to design better positions using options!