Shares of transportation stocks as a group are higher by roughly 18% year-to-date. While most of this performance took place in the first two months of the year and the group has been trading in a choppy fashion since, some transportation stocks such as Kansas City Southern (NYSE:KSU) have rallied in near-vertical fashion in recent weeks. KSU stock at this stage is notably overbought in the near term and sets up for a short-side play for active investors and traders.
On top of my daily routine when talking to clients is to point out that in order to understand the current state of any group or sector of stocks through ETFs one must be aware of what those individual stocks (at least the heavier weighted ones) are acting like.
When I do this exercise on transportation stocks, which ranges from truckers to railroads, package delivery, airlines and more, I note that KSU stock has largely been an outperformer of late. Such leadership is a positive thing to see. However, I also think that as a result, KSU stock has gotten over its skis and rallied too hard to sustain at this rate.
KSU Stock Charts
For perspective let’s look at the multiyear weekly chart, where we see just how “vertical” or “parabolic” this stock’s rally has been. Yes, KSU stock did stage a nice breakout above its 2015 highs. But it also blew out of its more orderly up-trend of recent years as marked by the purple parallels.
A glance at the simple MACD momentum oscillator at the bottom of the chart shows us how overbought the stock is in that sense. All else being equal I suspect that KSU stock from here needs to consolidate lower for at least a little while. Then it can potentially pick up again.
On the daily chart, the recent ascent in the stock has left it stretched above its medium term moving averages and also all-time record overbought on the daily MACD momentum oscillator at the bottom of the chart. Over the past few days, the stock has found it increasingly difficult to hold its intraday rallies, and through the lens of technical analysis printed some buyer exhaustion candles. While I am not calling for a major collapse in the stock here, a mean-reversion move lower to the tune of 5% or so should not be too much to ask for.
Active investors and traders could short KSU stock around the mid $150’s for a first downside target around $147. With implied volatility cheap, one could also consider buying the January $155-$145 bear put spread. Any strong bullish reversal upon a consolidation phase would be a stop loss signal.
The highest-probability trade, however, that sets up well for this position in Kansas City Southern stock is to sell an out-of-the-money call spread (options credit spread) in a very specific way. I am hosting a special webinar Friday, Nov. 15 to go over this setup in detail. Register here.
Special free webinar: How to generate stock market income with options credit spreads like a pro. Register HERE.