Railroad Stocks Are Still on Track

Big railroad stocks continue to outperform the broad market, and though this trend looks likely to continue, it’s now time to tighten stop levels and book profits on select open positions.

One of the best-performing industry groups since the October 2011 lows has been the railroads, which comes as a positive sign for the economic recovery. Though these stocks are generally considered to be defensive in nature, railroads should continue to benefit if crude oil prices stay at current high levels.

As a sector, the Dow Jones Railroads group has outperformed the Spyder Trust (SPY) by over 17% since October lows. In late October, there were three railroad stocks that I recommended buying, and though all three are up from the entry levels, stops now need to be adjusted and profits taken on one of the positions.

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Chart Analysis: The Dow Jones Railroad Index tested the 2011 highs last week at 855 (line a), which was an all-time high. The weekly close convincingly above the late- October and December highs is positive.

• The relative performance, or RS analysis, moved sharply above its weighted moving average (WMA) in mid-October and made new highs this week
• This is positive for the intermediate term, and long-term RS support now stands at line b
• Volume has picked up over the past two weeks, and the on-balance volume (OBV) held above support at line c
• The OBV is back above its weighted moving average but has not yet made new highs
• The railroad index came close to first support at 815 on Friday’s pullback with stronger support in the 780-800 area

Norfolk Southern Corp. (NSC) is a $25.7 billion company that currently yields 2.2%. NSC slightly exceeded the 2011 highs last week when it reached $78.50.

• The 127.2% Fibonacci retracement target and the upper parallel resistance, line d, are now in the $83.50-$84 area
• The RS line has turned up from support, line f, and is still in a clear uptrend
• Weekly OBV has moved above its weighted moving average but is still below its previous peak. It is well below the early-2011 highs
• The daily OBV (not shown) is positive but does allow for a short-term pullback
• There is next good support for NSC in the $72.80-$73.50 area

NEXT: The Strongest (and Weakest) of the Railroad Stocks

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Union Pacific Corp. (UNP) is the strongest of the large railroads, as it is a $53 billion company with a current yield of 2.2%. It is scheduled to report earnings on January 19.

• UNP has moved convincingly above the July highs at $107.89, hitting a high of $112.52 last week
• The 127.2% Fibonacci retracement target is at $116.20 with the weekly and monthly Starc+ bands at $118.40-$118.70
• The RS line broke through its short-term downtrend (line b) and its weighted moving average in the latter part of October
• Though it is hard to tell on the chart, the weekly OBV did make new highs last week, confirming the price action. Good long-term OBV support is at line d
• The daily indicators (not shown) did confirm the recent highs
• There is initial support for UNP at $106-$107 with stronger support at $103.50

CSX Corp. (CSX) has been the weakest of the three railroad stocks despite its 2.1% yield. The weekly chart shows that last week’s close was right at weekly trend line resistance, line e.

• There is further resistance in the $24-$25 area
• The RS analysis is still locked in a trading range, lines g and h, suggesting that a new uptrend has not yet started
• Weekly OBV is acting stronger than prices and is very close to major resistance and the all-time highs at line i
• Daily OBV and RS analysis (not shown) look stronger
• CSX has first good support now in the $21-$21.50 area

What It Means: The positive RS analysis in October indicated that the railroads were starting to act stronger than the S&P 500. The strategy then was to establish a 50% long position on a pullback to first support and add another 50% if the breakout levels were retested. As it turned out, all three stocks gapped lower, hitting both buy levels.

Though the broad market may correct over the near term, the railroad stocks, especially Union Pacific Corp. (UNP) and Norfolk Southern Corp. (NSC), are acting well. Regardless, stops should be raised on all these positions.

How to Profit: Norfolk Southern Corp. (NSC) gapped lower on November 1, opening at $70.92 and hitting both buy levels. Raise the stop now to $71.42, sell half the position at $79.20 or better, and raise the stop on the remaining position to $74.28.

Union Pacific Corp. (UNP) also hit both buy levels on the November 1, opening at $96.17. Raise the stop now to $99.18, sell half the position at $115.20 or better, and raise the stop on the remaining position to $103.56. If we get a decent pullback, I may again look to initiate new long positions.  

CSX Corp. (CSX) also hit both buy levels on the November 1 opening at $21.04. Raise the stop now to $20.62. Since CSX is lagging, sell half the position at $23.12 or better.