Stock Market Seasonality in June

Posted by Don Vialoux - Timing the Market

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The Dow Jones Transportation Average recently completed a period of seasonal strength. What is the preferred strategy now?

According to Thackray’s 2011 Investor’s Guide, the Dow Jones Transportation Average has two periods of seasonal strength: from the end of February to the end of May and from Oct. 10 to Nov. 13.

The March to May period was profitable in 12 of the past 15 periods for an average gain per period of 7.9%. The October to November period was profitable in 18 of the past 20 periods for an average gain per period of 5.5%.

What happened during the recent March to May period? Since recommending the sector in this column March 22, the Dow Jones Transportation Average and its related exchange-traded fund, the iShares Dow Jones Transportation Average ETF (IYT/ NYSE), have gained 6.0% plus a dividend, or slightly less than the average for the period.

Prospects for the sector have deteriorated since the beginning of May. The sector is facing a series of events that are expected to slow earnings growth in the second and third quarters including high-er fuel costs, disruptions in shipping and rail operations in southeastern U.S. states and volcano ash over Europe.

In addition, U.S. economic data released during the past two weeks suggest a slow down in demand for transportation services. Over the past two weeks, several economic reports covering durable goods orders, industrial production, capacity utilization, existing home sales, manufacturing indices and leading economic indicators all fell short of what economists predicted.

On the charts, the Dow Jones Transportation Average, currently at 5,400, peaked at 5,565.78 on May 2. Since then, technical parameters have deteriorated. Stochastics, relative strength index and moving average convergence divergence (MACD) have rolled over and are trending down.

The Average recently tested and held above its 50-day moving average currently at 5,340. A break below its 50-day moving average suggests downside risk to its next support level at 5,175. Thereafter, downside risk is to its 200-day moving average currently at 4,960.

The preferred strategy is to take seasonal trading profits on the Dow Jones Transportation Average as well as U.S. transportation stocks.


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