According the market lore, the broader stock market can't go anywhere unless the stocks in the Transportation Index, or transports, are along for the ride. The thinking is simple. Transport companies are obviously those that move products from Point A to Point B. As such, the group is a reflection of economic activity in the country. The economy and stocks aren't tied at the hip, but one doesn't exist without the other.
As Yahoo! Finance's Michael Santoli and I discuss in the attached clip, the transports are telling anyone who listens that the economy is in better shape than most people think. The Dow Jones Transportation Average (^DJT) is up 8.5% already in 2013, nearly twice the gains of the Dow Jones Industrial Average (^DJI) itself. High fuel prices, dropping demand for coal and what some say is a slowing economy caused by fiscal uncertainty are proving no match for buyers of shares in the railroads, airlines and shippers.
"Logistics companies, parcel companies, rails, airlines, all of those are really in gear right now," says Santoli. "Since the lows of November, the transports have been straight up, not just leading the market but almost dragging the market up with them."
Leaving aside superstitions about relationships between shippers and "normal" stocks, the only question that matters for investors is whether or not there's still money to be made. Santoli's best guess is that there is, but not just yet. Healthy stocks don't move in a straight higher but rather advance, pause then resume an upward trajectory. Santoli says a "gut check" is in the offing as traders realize that the economy, while not shrinking isn't likely to grow at 4% in Q1.
The bottom line is the transports are working. Chasing stocks higher after two months in a row of gains is generally ill-advised, but ignoring the sector entirely borders on investing suicide.