It's generally a very good sign to see transportation stocks ($TRAN) breaking to new highs. Currently, the TRAN is at an all-time high and all signs are pointing to continuing strength, as far as I can tell. Transports do well when our economy is strong or when it's expected to strengthen. There's no other reason for transports to rise. When the economy strengthens, more shipments take place, and corporate profits grow. And in the historically-low interest rate environment that we're enjoying, any increase in profits and profit growth is magnified. If you'd like to see the recent history of the S&P 500 when transports break out, check out this 10 year weekly chart:
The transport breakouts typically lead to a powerful run higher in the S&P 500, as illustrated above. Also, at the bottom of the chart, check out the correlation. There's a VERY strong positive correlation between the direction of transport stocks and the direction of the S&P 500 and it's highlighted above with the blue-shaded area. It stands to reason that if transports trend higher, the S&P 500 will very likely follow suit. I believe the move we see in the S&P 500 over the next 18-24 months will be similar in scope to what we saw the last two times that transports broke out. Given the extremely low interest rates, we may even see a stronger rally.
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