There are a handful of sectors you should always keep an eye on… even if you’re not invested in them.
That’s because certain corners of the market expose the economy’s inner workings. And when those areas struggle, it’s often a sign of larger problems to come.
Transportation stocks have long been one of these classic bellwethers. These stocks benefit when goods are moving around. But they’re also the first to feel the pain when economic activity slows down.
That’s what we’re seeing now. One of the main funds tracking the transportation sector recently hit a new 52-week low. Normally, we’d expect that to lead to further losses. But this is one time where you shouldn’t stick with the trend…
Instead of a downturn, we can expect outperformance from transportation stocks. Now, this comes with one caveat, which I’ll cover… But history shows we can expect double-digit upside from here.
Let me explain…
Transportation stocks have a tendency to top out before major market peaks. It happened before the tech bubble burst… and again ahead of the global financial crisis.
Fortunately, this sector peaked alongside the S&P 500 Index earlier this year – not ahead of it. So I’m not writing to warn you of a coming crash.
Instead, we’re simply looking at the new low in transportation stocks from a few weeks ago. (The overall market hasn’t hit a similar low yet.)
Specifically, the iShares Transportation Average Fund (IYT) hit a new 52-week low on April 8 – the first we’ve seen in more than two years. Take a look…
The recent sell-off took less than two weeks and pushed shares to a new low. As trend-followers, that would normally be enough to keep us away from this sector.
But after digging into the data, an entirely different outcome emerged…
Unlike most corners of the market, transportation stocks have a history of outperforming after hitting a new 52-week low.
I ran the numbers on IYT’s underlying index. Its data goes back more than two decades. Here are the results…
The transportation sector isn’t “sexy”… But it’s a consistent performer. These stocks have returned 9.4% in a typical year since the turn of the century.
Buying after a new low offers even bigger upside, though. Similar setups have led to 12.6% gains in six months and a 13.1% gain in a year. That’s solid outperformance when you’d least expect it.
It’s important to note one thing, though… Setups like this have only occurred seven other times. And while six of those extremes led to gains, one led to a negative return in 2007. In that case, transportation stocks fell 37% over the next year.
If you remove that loss, the typical one-year gain is 25%. So we can expect transportation stocks to either do very well or very poorly from here… And a positive gain is the more probable outcome.
Either way, a “boring” return isn’t likely, based on history.
I still recommend you wait on the trend before putting money to work. But that’s my own preference in investing. History suggests this is one time you can ignore the trend. The new low isn’t something to fear… Instead, it’s setting up big gains.
Good investing,
— Brett Eversole
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Source: Daily Wealth