Monday, October 17, 2011

Railroads: Combining Some Factors for the Bulls

While I am not one to trade based on economic reports, one indicator that I do like to watch is rail traffic.  Below is a video with Warren Buffet being interviewed by Becky Quick of CNBC and in it he states that he considers freight car loadings as his favorite economic statistic. 

I am no expert in economics but I do consider Mr. Buffet an expert and his opinion does make sense to me. If rail traffic is up, then it seems logical that raw materials and supplies are being moved and more than likely consumed. A trader can find weekly reports of rail traffic from the Association of American Railroads. Sample below from the website:
In keeping track of the Weekly Rail Traffic Summary, I can see that the last 3 weeks are showing gains comparing to previous slight gains or mixed results. This gets me interested in railroads as it looks like they have the economic support to justify higher prices. Knowing this, I then turn to the charts to see if they have a decent structure.

*Sorted by 10 day Rate of Change

To the right and below are some charts of railroads.  Looking through the industry, a majority of the charts look bullish.  

These are just some charts.  I would also favor looking at the railroads with larger market capitalization (KSU, NSC, UNP, CSX) and looking at their current valuation.  

Another tool a trader could use is options activity.  Look at where there is large open interest and see if it changed (were institutions closing bullish trades) during the recent sell off or did those traders have the confidence to keep in the trade.  

There is never a guaranteed trade and you can never be an expert in all fields.  What you can do is collect the data or opinions of experts in those fields and try to stack your deck with as many cards as you can.  Who knows further data from the Association of American Railroads may come out showing a decline and the charts may also deteriorate as well but I wanted to show how a trader can take as many factors as possible (expert opinion combined w/economic reports, technical & fundamental analysis, leveraged bets by institutions) and try to put the odds on your side. 

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