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Is There a Trade in Trains?

Examining short-term weakness for railroad stocks NSC, KSU, and UNP

by 1/25/2012 7:41:24 AM
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With the iShares Dow Jones Transportation Average Index Fund ETF (IYT) closing lower for a third day in a row ahead of trading on Wednesday, it is no surprise to see weakness in one of that sectors leading components: the rails. Here, the most interesting member of the group is Norfolk Southern Corp. (NSC), a major Virginia-based company that operates a pair of freight railroads in the United States and Canada. NSC reported earnings after the bell on Tuesday that were better than expected, but revenue fell short of consensus estimates.

What is interesting is whether or not this will provide a catalyst for buyers to enter the market, or if the stock will have further to fall. NSC finished lower for three days in a row as of Tuesday's close, trading at new short-term lows just outside of technically oversold territory.

Another significant pullback in the group is in shares of Kansas City Southern (KSU). This railroad stock plunged by more than 7% on Tuesday, marking its third consecutive selling day with bearish emphasis. Trading at new, short-term lows and in technically oversold territory, KSU's severe selling was largely a function of the mixed news from the company's quarterly earnings announcement on Tuesday. That said, traders had been trimming positions for days before Tuesday's breakdown, with six out of the previous eight sessions closing lower.

Also worthy of note among railroad stocks that have begun to pull back in bull-market territory are shares of Union Pacific Corp. (UNP). Like Norfolk Southern, UNP has begun to pull back in response to a rally to 52-week highs, and finished at essentially break-even levels on Tuesday.

Want more stocks? Read our latest from 7 Stocks You Need to Know: Volatility and Visa's New High.

David Penn is Editor in Chief of TradingMarkets.com

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