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Transports Lead an Improving Economy

David Becker
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Transports Lead an Improving Economy

An improving US economy is beginning to drive US stocks higher and transports have been one of the leaders, which reflect a strong underlying economy. In the new world of online purchases, and oil production the movement of products via trains, planes and trucks is a key tell for market participants. Thursday stronger than expected ISM services employment shows what the charts have been saying for a while that US services and transportation will help drive the next leg of US economic expansion.

The ISM non-manufacturing number registered 53.1 in March, 1.5 points higher than February’s reading of 51.6 percent. Expectations on the headline number were for a climb to 54, but the sub-components carried the day. The New Orders Index registered 53.4, 2.1 percentage points higher than the reading of 51.3 in February. The Employment Index increased 6.1 percentage points to 53.6 from the February reading of 47.5 and indicates substantial growth after one month of contraction.

The weekly chart of the Dow Transports versus the Dow Jones Industrials shows that transports broke out at the beginning of 2014, and also the weekly spread between the two indices has chopped around in 2014, the bias is to the upside. The spread is calculated by dividing the Dow Transports by the Dow Jones Industrials. As the spread increases in price, the Transports are outperforming the industrials.

In the middle of 2013 the 50-day moving average of the spread crossed above the 200-day moving average of the spread, which shows that a long term uptrend is in place. Support on the spread is now seen near the breakout level near 0.45. The RSI (relative strength index) is moving higher with price action which reflects increasing momentum while still printing near 60 which is on the upper end of the neutral range.

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