Dow Transports Versus Oil

The large selloff in the Dow Jones Transportation Average in February when the price of oil was surging higher has been well documented.  Today, however, the Transports experienced a significant drop due to weakness in FedEx (FDX), even as the price of oil sold off as well.

Below are six-month charts of the Dow Transports and the price of oil.  As shown, the Transportation Average just touched its prior bull market high this past Monday, but the index quickly pulled back and is now trading back below its 50-day moving average.

Since peaking out above $109 on a closing basis in late February, oil has pulled back and is currently in a short-term sideways trading range.  Unlike the Transports, oil has managed to hold above its 50-day as well as another key support level.

With all the talk about the inverse relationship between the Transports and oil, below we highlight a rolling 50-day correlation chart between the two asset classes going back to 1983 (using daily percentage changes).  Over the last 50 days, the correlation between the Transports and oil has been 0.27 (1 is perfectly correlated, 0 is no correlation, -1 is perfectly inverse correlated).

Interestingly, we're just coming off of a period where the Transports and oil were as correlated as they've been in decades.  From the mid-1980s until mid-2009, the rolling 50-day correlation fluctuated mostly between -0.5 and +0.3.  But from mid-2009 through late 2010, and then once again in late 2011, the correlation between the two spiked up into the 0.70s.  It wasn't until last November that the two started increasingly moving in the opposite direction of each other.

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