(by Sy Harding, editor Street Smart Report) The transportation stocks often lead the economy in both directions. That makes sense since truckers and railroads get an early look at the beginning stage of economic reversals in both directions.
They get to see changes in the shipments of raw materials to manufacturers, sub-components from suppliers, and finished goods to wholesalers, as well as changes in import and export shipping volumes, well before they show up in sales reports, which are lagging indicators.
With that in mind the DJ Transportation Average, as well as mutual funds and ETFs focused on transportation stocks, have been a cause for concern for some time.
In 2011 the stock market plunged into a fairly serious summer correction as the economic recovery stalled. The S&P 500 fell 18% in that correction. But the DJ Transportation Average plunged 28%, past the official 20% threshold that defines a bear market.
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The stock market recovered from that sell-off as the economic recovery got back on track. The S&P 500 and other major indexes resumed the bull market that began in 2009, recovering all the way from the 2011 correction and moving on to new highs.
But the transports created concerns again in 2012. The DJ Transportation Average recovered from the 2011 sell-off along with the rest of the market, but only until early 2012. It then rolled over to the downside and moved lower all year.
That left the worrisome possibility that its partial recovery was only a bear market rally, and its new decline was the beginning of another leg down in a bear market. That was not a good omen for the economy.
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So the upside breakout since November from that decline is encouraging news for the economy. To provide more encouragement it needs to move out above its 2011 peak and confirm the new highs made by the rest of the major market indexes.
But one step at a time. Having been down the most it has the furthest to rise if it is to catch up to the rest of the market.
Our technical indicators caught that and we previously added a 20% position in the iShares Transportation ETF (IYT) in our model portfolio.
It has become our best holding so far in the favorable season rally that has been underway since November, and it should continue to outperform the rest of the market as long as the winter rally lasts.