Why Transports Are So Important In The Long-Term

Many technical analysts have been baffled by the stock market's unrelenting advance in 2023, especially on the NASDAQ.

The S&P 500, meanwhile, has pushed higher, but has lagged badly on a relative basis. One reason why is that industrials have struggled on both an absolute and relative basis. It's fairly easy to illustrate the importance of transports (a big part of industrials) by using the correlation coefficient indicator at StockCharts.com. I do want to emphasize that big rallies in the S&P 500 are generally accompanied by rallies in transports, though they do NOT necessarily require relative strength in transports:

Enter S&P 500 ($SPX):

Isn't it rather clear? When transports are rising, the S&P 500 surges. Since October, the transports have been on the move higher. And what has the S&P 500 done? It appears to me that it's come roaring back from a cyclical bear market. Some will astutely point out that transports have been lagging the past several months. On a relative basis, I wouldn't argue. But on an absolute basis, there's been little to no technical damage on the transports chart. The correlation is almost always positive between the S&P 500 and transports, but if you notice, we've just dipped into inverse correlation territory, which is quite unusual. That makes me believe that either the S&P 500 will turn lower and follow transports......OR transports are just getting started back to the upside as rotation lights another fire under the group. Time will tell, but I'd bet on the latter.

Happy Trading! Tom Bowley Chief Market Strategist EarningsBeats.com Better Timing. Better Trades.