Mitchell Clark writes: The Dow Jones Transportation Average experienced a powerful breakout this past December. And it’s been a stealth rally ever since, with an expansion in valuations, not earnings.

The stock market’s strongest sector over the past few months has been transportation stocks, which have been much stronger than technology stocks or the S&P 500 companies. Even though it doesn’t seem real, leadership in the Dow Jones Transportation Average is a classic stock market sign.

Helping the cause are lower oil prices. Countless names among large-cap transportation stocks are soaring. And at new 52-week highs, they still aren’t expensively priced on the stock market, which means they can go higher.

The stock market likes betting on the future. Institutional investors are not fighting the Federal Reserve; they are buying in anticipation of first-quarter earnings season. Fourth-quarter earnings season wasn’t that bad for corporations, but for individuals, it’s another story. This is why the stock market and the Dow Jones Transportation Average can still tick higher—valuations and oil prices. The stock chart for the index is featured below:

Chart courtesy of www.StockCharts.com

The stock market will use first-quarter earnings season as its new catalyst for action. My expectation is that we’re in for a meaningful correction, even if first-quarter numbers are decent.

There is a real disconnect in the U.S. economy between the stock market and the Main Street economy. Corporations have all the money, and any modest uptick in economic activity will amplify the bottom line. Corporations, being lean and mean with dividends and share buybacks, are way better than individual incomes.

This is a very difficult market to play. Risk for new long positions is high because the stock market has already gone up. The Dow Jones Industrials are lagging the Dow Jones Transportation average, but the strength in blue chips is undeniable.

Any uptick in economic statistics won’t translate to disposable incomes anytime soon; but an uptick will translate to corporate earnings, and that’s the only play for stock market investors.

Whether you agree with the Federal Reserve’s policies or not, it doesn’t pay to fight the Fed or the ticker tape. Components in the Dow Jones Industrials are not expensively priced by any means, and dividends are increasing. The disconnect between Wall Street and Main Street will continue this year.

Institutional investors, for the most part, get paid to buy stocks. They have to worry a lot less than the vast majority. Right now we’re seeing a lot more price inflation—real inflation in the form of higher taxes, food, and energy costs, and real inflation in services.

I would not be buying this market or any component within the Dow Jones Industrials right now. According to the numbers, there has been improvement in the industrial, old economy businesses in the last two quarters. And I expect this trend to continue through the near term. Current strength in the Dow Jones Transportation Average is real and meaningful, but this doesn’t help individuals or the employment situation.

A little more upside followed by correction—that’s what’s in store for the U.S. economy. Whether the correction will be a buying opportunity is a total crapshoot.

Bio: The Daily Gains Letter provides independent and unbiased research. Our goal at the Daily Gains Letter is to provide our readership with personal wealth guidance, money management and investment strategies to help our readers make more money from their investments.

Only logged in users are allowed to post comments. Register/ Log in

The Market Oracle is a FREE Financial Markets Forecasting & Analysis web-site.
(c) 2005-2024 MarketOracle.co.uk (Market Oracle Ltd) - Market Oracle Ltd asserts copyright on all articles authored by our editorial team and all comments posted. Any and all information provided within the web-site, is for general information purposes only and Market Oracle Ltd do not warrant the accuracy, timeliness or suitability of any information provided on this site. nor is or shall be deemed to constitute, financial or any other advice or recommendation by us. and are also not meant to be investment advice or solicitation or recommendation to establish market positions. We do not give investment advice and our comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to enter into a market position either stock, option, futures contract, bonds, commodity or any other financial instrument at any time. We recommend that independent professional advice is obtained before you make any investment or trading decisions. By using this site you agree to this sites Terms of Use. From time to time we promote or endorse certain products / services that we believe are worthy of your time and attention. In return for that endorsement and only in the cases where you purchase directly though us may we be compensated by the producers of those products.