Rail Report Weighs on Transports ETF

The iShares Dow Jones U.S. Transportation Index ETF (IYT - commentary - Trade Now) looks to test recent lows set in the $64-to-$67 area after failing to achieve a new high. From yesterday's close, it implies a drop of between 5% and 10%.

I commented last week on the recent uninspiring performance of IYT. I mentioned that even with a Warren Buffett buyout of Burlington Northern (BNI - commentary - Trade Now) at the start of the month, the chips remained stacked against the fund's index in terms of momentum in the near term.

This week, the index continued to trade below the $73 resistance barrier, and an unflattering rail report didn't help matters. According to the Association of American Railroads, U.S. rail traffic dipped nearly 9% from the same period in 2008. Additionally, the numbers were down 17% from this week in 2007.

There was some slight improvement in the report, but not enough to turn the trend. The AAR report found that carloadings of nonmetallic minerals and grains increased 19% and 16%, respectively, from the same time last year.

IYT seeks to replicate the performance of the Dow Jones Transportation Average. A number of big-name railroads are among the fund's top holdings, including BNI (13% of IYT), Union Pacific Corporation (UNP - commentary - Trade Now) (8.66% of IYT) and CSX Corporation (CSX - commentary - Trade Now) (5.12% of IYT).

In September and October, the end of the month was bad for stocks. With a holiday next week, I don't expect major moves in the market, but similar behavior this month suggests that the weak indices (like the Transports) will finish lower from here. If December also holds to the pattern, in which the start of the past three months was good for stocks, it may provide a good buying opportunity.

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At the time of publication, Dion had no positions in the stocks mentioned.

Don Dion is president and founder of Dion Money Management, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.

Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.