Talking Numbers

The oil spike is about to ruin the hottest trade of the year

It's been a record month for transportation stocks. But, will the spike in oil put an end to that?

The Dow Jones Transportation Average reached all-time highs just one week ago. Since then, it has fallen 2 percent. According to Richard Ross, global technical strategist at Auerbach Grayson, more down days are on the way.

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"I’m quite bearish," said Ross, a "Talking Numbers" contributor. "This is one of my higher conviction calls on the short side, in a world where the short side is not really working particularly well. But, I think we have a very nice bear candidate here with those transports."

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Ross notes the iShares Transportation Average ETF (IYT), which tracks the Dow Transports, has stayed above its 100-day moving average for much of the past 12 months. He sees the recent peak as a "blow off top" and considers it "the exhaustive stage of this fantastic move."

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But, it's the long-term chart that has Ross concerned. "Yes, it has been a fantastic performer, but that’s the history," Ross said. "Going forward, I think we could see a sharp pullback."

Key to Ross' long-term charts is the 150-week moving average. In 2011, the IYT dropped 32 percent down to its 150-week moving average. Ross calculates that at its recent peak, the ITY reached about 40 percent above the 150-day, which is currently at 150.54.

"That is simply not sustainable," Ross said. "This is not a compelling entry point on the long side. You have to be a seller if you do have gains and look to be a short seller if you are an aggressive trader."

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For David Seaburg, head of equity sales trading at Cowen and Company, there will be one likely culprit in bringing down transportation stocks – higher expenses.

"It's cost structure here – costs are going up," said Seaburg. Those higher costs include drivers demanding more money and higher oil prices. The price of WTI crude oil contracts were at $106.79 per barrel on Monday – 2 percent higher than the previous week – on concerns over production in Iraq.    

But, Seaburg sees another cost that could also come with a rebound in the economy – competition with other industries for drivers. "As the economy improves," he said, "you're going to find that a lot of the truckers are going to leave."

"Long term, I think it could be a different set up," added Seaburg. "But, near term, I would be a seller here."

To see the full discussion on transportation stocks and the IYT, with Ross on the technicals and Seaburg on the fundamentals, watch the above video.

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