Shares of Federal Express (FDX) are down 4.3% today following quarterly results and guidance that disappointed investors as the company failed to inform investors how their recent $4.8 billion acquisitive of TNT will impact earnings in fiscal 2017.
Heading into today, FDX was one of the best performing members of the Transportation sector, up nearly 10%, while its competitor UPS (down 1% in sympathy today) remains up 10% in 2016. The two stocks combined make up about 22% of the weight of the IYT, the etf that tracks the Dow Transports, which mildly out-performs the S&P 500 (SPX) this year, up 2.5% vs 2%.
To my eye, the IYT is a trainwreck waiting to happen with the etf having topped out well before the SPX. Since making an all time high in late 2014, IYT is down about 18.5%, recovering from what was a 31% peak to trough decline back in February. The two year chart shows a well defined downtrend:[caption id="attachment_64547" align="aligncenter" width="600"] IYT 2 year chart from Bloomberg[/caption]
The chart above shows what appears to be an air-pocket to the downside between $130 and $120, but the chart from the 2008 lows shows the long-term uptrend in severe jeopardy and long term support closer to $100:[caption id="attachment_64553" align="aligncenter" width="600"] From Bloomberg[/caption]
Short dated options prices in the IYT have shot up off of near 52 week lows of late, but remain well below the panic levels from last August and to a lesser degree the volatility that gripped risk assets in Jan/Feb of this year:[caption id="attachment_64548" align="aligncenter" width="600"] IYT 30 day at the money implied volatility from Bloomberg[/caption]
If we get past Brexit in the next few days (I’m not expecting the leave vote to prevail, although it is close) U.S. economic data and corporate earnings will quickly become the focus with June non-farm payrolls on July 8th, and Q2 earnings starting in earnest the week after. The response of stocks like Adobe (ADBE), Hewlett Packard (HPQ) Lennar (LEN) and FDX in just the last 24 hours is not particularly encouraging, all considerably lower.
Also following the Brexit vote, the Fed’s recent cautious tone will be the next point of tension depending on the June jobs data. If we see a strong print (assuming a UK remain), there will be renewed pressure on the Fed to act. If we see a weak print, then there is no way the Fed raises at their July 27th meeting (Fed fund futures currently pricing only 6% chance), and the weak patch of economic data will likely weigh on forward earnings guidance. When you look at the top 10 holdings of the IYT you see just how economically sensitive the group is to shifts in consumer and corporate demand, from Bloomberg:
So what’s the trade?
We would like to see what happens in the market over the next 2 days with the Brexit vote. If remain looks likely (markets may know before the media as UK hedge funds are allowed to exit poll and trade on that data) we could see a spike higher near term. That could be an opportunity to enter a short on IYT. If leave looks like it has a fighting chance, markets will be heavy and then it’s a choice of whether to press a trade like this. We’ll update this post if and when we decide to trade.