Buffett Rescues the Transports -- for Now

Monday's close of 3599.84 for the Dow Jones Transportation Index was the lowest closing value since Aug. 17 of this year. The 3600 level has formed a support line since August, which has been tested four times, including yesterday.

Things were looking less than rosy for the index, which had been diverging from the Dow Jones Industrial Average. Contra the transports, the industrials had been the strongest of the major indices. The developing question was whether the Dow would turn down or the transports move up.

Thanks to Warren Buffett, we have an answer.

Buffett's $34 billion purchase of Burlington Northern Santa Fe (BNI - commentary - Trade Now) sent the transports up 4.5% at the open and the iShares Dow Jones U.S. Transportation Index (IYT - commentary - Trade Now) up 4.7%. BNI is the largest holding in IYT, at 11.38% as of yesterday's close.

Shares of BNI gained more than 28%, and with the deal valued at $100 per share, shares only have about 3% more to go. BNI's advance accounts for nearly 3% of IYT's gain, and the halo effect lifted other railroads such as Union Pacific (UNP - commentary - Trade Now) and CSX (CSX - commentary - Trade Now) by 5.5% and 6.5% in early trading. Those two firms account for 8.12% and 4.92%, respectively, of IYT's assets.

FedEx (FDX - commentary - Trade Now), which makes up 10.72% of the index, was up 1.4% early, and UPS (UPS - commentary - Trade Now), 8.37% of the index, had a small gain of 0.3%.

I would not buy shares of IYT here until there's a follow-through. While today's move could hold and the technical picture has improved, there needs to be broad support for transportation stocks. A Buffett-fueled rise in the rail sector is not enough.

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