Shipping Surges on Little News

I was in shock at the turnaround.  My shipping index was up 4.4%. (At 98.6) EXM was up over 20%!  GNK, TBSI, EGLE, all up big. But the S&P was only up half a percent or so. So what is going on?

My first thought - ok, so the S&P head and shoulders formation is complete, a sharp down move took place to a known support level, so the market is bouncing up, especially because of the start of earnings season.  Everyone is ready to speculate, and they will put their money into the most downtrodden shippers.  Does it fit?  Not at all.  The market has not moved enough to trigger this amount of breadth in the shippers.  The distribution of the SMA20 position in the winners is not lower (more oversold) than the losers. In fact, the non-winners tend to be those which are carrying more debt per equity. That means that buyers are being selective.  So it isn’t just a bounce, there is value buying going on here.

Quarryman reported a rumor that Genco might be acquired, perhaps at $26 or so.  But I spent some time hunting for this rumor on the news sites, without luck. If it is a rumor, it is not an especially widespread one.  Other news?  TNP got a new charter, and DSX as well. Neither are leaders here.  There is no real news powering this rally!  It has to be something else.

It didn’t take me too long to stumble on the answer.  It was all caused by CSX.  Yes, a railroad.  CSX tightened their belt and reported much better earnings than expected.  When the market is demoralized and sees little improvement coming up in the economy, it keeps its eye on railroads.  This is nothing new - it is expected that increased economic activity will trigger certain leading indicators, and transportation of cargo is one of these indicators.  In fact, there is a formulation called Dow Theory which describes the cycles as being led by transportation - usually railroads.  Dow theory is old, really old, but surprisingly effective.  It says, among other things, that Bear Markets reverse and go higher when railroads start to recover. In this day, of course, dryshippers, container shippers, and product shippers are occupying the same niche as railroads, and it is not unreasonable to assume they will either follow or be followed by railroads when recovery begins.

So in general, the shippers are rallying because Dow Theory believers suspect that the outperformance of CSX is the first sign of recovery.  The move could be significant, as long as the Dow adherants remain in control and not disappointed in the upcoming earnings reports.  Some key shippers to consider are: PRGN, NM, GNK, EXM, TBSI, OCNF, and FREE.  Other railroads deserve some attention as well. Caution - tankers are not necessarily part of this move yet.  Good luck! 

by Skymist