Why Stocks Won’t Break Until This Indicator Does

The One Indicator Keeping This Market AliveThe Dow Jones Transportation Average keeps powering ahead, and the rest of the stock market is very close behind it.

The strong performance of this index is confirmation of further Dow theory gains. The Dow Jones Industrial Average has been fighting its way higher since May 20.

Some of the performances of transportation stocks have been truly spectacular and very much a reflection of a bull market.

Alaska Air Group, Inc. (ALK) just bounced off $100.00 a share. It was $50.00 a share late June last year.

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Union Pacific Corporation (UNP), which has been one of my favorite benchmark stocks for gauging industrial economic activity and the stock market, is right around $200.00 a share. (See “Buybacks, Dividends, Stock Splits: Business Is Getting Better for This Must-Watch Stock.”)

It was $150.00 a year ago, which is a very good capital gain for such a mature large-cap enterprise.

And Southwest Airlines Co. (LUV) just hit an all-time record-high, about double what it was trading at this time last year.

The Dow Jones Transportation Average is old economy, but it is a very meaningful gauge for the rest of the stock market. I advise all investors to follow the index on a frequent basis. The broader market is highly unlikely to break down without a commensurate move in transportation stocks.

The NASDAQ Composite and Russell 2000 can certainly be more volatile, but generally speaking, so long as the Dow Jones Transportation Average is holding up, so will the rest of the market.

Since the financial crisis, big corporations have been very unwilling to invest in new operations. But in what offers a glimmer of hope in big corporate investment is the merger and acquisition activity. The increased activity is a reflection that big companies are starting to consider more risk and also that sentiment among management is improving.

In many cases, growth through acquisition is cheaper and more accretive to earnings than developing new businesses from the ground up. Of course, growth through acquisition is all about “synergies,” which translates into average expense reduction. But that is the corporate game and shareholders typically are the beneficiaries.

Getting back to transportation stocks, most of the stocks that compose the Dow Jones index have come back after the sell-off at the beginning of the year. Even FedEx Corporation (FDX) and United Parcel Service, Inc. (UPS) have broken out of their recent consolidations and appear to be poised for new highs.

This is still a market without much conviction, and perhaps that’s the case because the Main Street economic performance is not growing at the same rate as a lot of stocks.

Strength in transportation stocks is a classic bull market indicator. But I don’t view the bull market as beginning at the March 2009 low, but rather, the beginning of 2013, as stocks broke out to the upside with significant conviction from the previous recovery market and cycle.

Regardless of where we’re at and what it’s called, strength in the transportation sector is a very positive signal.

There’s some catching up to be done by other indices, but it’s all possible in what is still an environment favorable to equities.