MarketWatch: Why it’s time to invest in transportation stocks

By SIMON CONSTABLE

Has the lackluster U.S. economy finally become the little engine that could?

A quick look at the rail freight business suggests something good is happening. The only question is how long it lasts.

Movement of rail cars around the U.S. has surged so far in 2014 in a way not seen for years, as you can see from the chart.

Rail shipments — which include everything from coal, petroleum products, grains and auto parts — jumped 5.8% in May versus a year earlier, to a weekly average of 296,579, according to D.C.-based industry group American Association of Railroads. In April, they rose 6.9%.

Why should we care?

“It suggests the economy is expanding,” says John Osterweis, chairman and chief investment officer of San Francisco-based Osterweis Capital Management.

Based on past experience he’s likely not wrong. A MarketWatch analysis of industrial production and rail car shipments from January 2001 through April this year shows that 63% of the variation in the growth of shipments is explained by changes in growth of industrial production. (The analysis is known as regression analysis, if you are interested.) The relationship makes intuitive sense also because much, but not all, of the things shipped are used in industrial processes.

It isn’t 100% because some of the items shipped aren’t used in industry, such as grains or road aggregates. In addition, there are timing differences — some things go into inventory and take a while to work their way into finished products.

The takeaway is that as rail shipments go, so goes manufacturing. But for investors, watching the rail data is just better. Why? For starters, the rail data comes out weekly, while the industrial data for the U.S. comes out half way through the following month. Even better, outside of rail stock analysts, the shipments data hardly get any attention.

To profit from the trend, if it continues, go for stocks in the transport sector such as “rails, transports, airplanes and industrials,” says Steven Pytlar, chief equity strategist at New York-based brokerage firm Prime Executions.

He doesn’t mention specific names, but likely beneficiaries would include FedEx, CSX, Norfolk Southern and Alcoa.

Then later in the economic cycle he says go for sensitive areas of the economy like energy and materials such as Exxon Mobil and BHP Billiton. He reasons that late in the economic expansion, cost pressures start to rise and such companies tend to be good inflation hedges.

See original story here.

WSJ: Try Stop Orders, For Peace of Mind

By SIMON CONSTABLE

Sometimes when you've made substantial gains on a stock or exchange-traded fund, you face a tough choice: Do you sell to lock in the profit? Or hold on for more gains but risk losing what's been made?

Mr. Elfenbein notes that once you have a gain on paper, it's psychologically very hard to watch it disappear. The ability to protect those gains makes the trailing stop order very appealing.One way to have your cake and eat it too is to use a trailing stop order: an order to sell your position if the price falls by a predetermined percentage or dollar amount. Most orders are set 20% below the current price, says Eddy Elfenbein, editor of the Crossing Wall Street newsletter. Some people also periodically cancel the orders and reset them at higher prices if there is a rally. Stop orders cost a little more than simple market orders.

But these orders aren't without peril. "There is a risk you get 'stopped out' of a good position," Mr. Elfenbein says. How so? Flash crashes—or temporary drops caused by electronic trading glitches or errors—may cause a position to be sold when it would have been better to hold on.

Another risk: When the stop price is reached, the order is filled at the market price. During periods of market disruption, that can mean you get a price much lower than where the "stop" was placed.

Trailing stops also are available for short sellers, who sell borrowed stock hoping to buy it back later at a lower price. Their stops take the form of buy orders set above the current market price.

See original story here.