Talking Numbers

A simple theory to explain why stocks are going higher

A simple theory to explain why stocks are going higher

Think the market has reached a top? Well one very old and widely followed market theory is signaling more gains to come.

Transports, which consist of stocks like railroad companies, airlines and truckers, are at record levels and are up 16 percent year to date. In fact, the group on Thursday hit a new all-time intraday high for the third straight session. and that has some bulls getting even more bullish.

"Dow theory is still good," said Chad Morganlander of Stifel's Washington Crossing Advisors. "It's a good barometer for the health of the economy."

(Read MoreThis sector is a hot investment right now)

Dow theorists contend that when transports do well, the overall market should follow. The logic is simple. As economic activity picks up, people tend to consume more, which requires people to ship, fly and truck objects around the world. In other words, these stocks are taking the pulse of the global consumer, and right now that pulse is strong, something that should hearten the bulls.

"You're seeing it in the economic indicators," added Morganlander. "Auto sales are strong. All the ISMs are strong. That's a reason to stay long."

Of course, much of the rally in the transports has been led by the airlines, which have benefitted from declining oil prices, but even from a technical perspective, the picture remains strong.

As Steven Pytlar of Prime Executions, pointed out, the IYT, the exchange-traded fund that tracks the transportation sector, recently bounced off a key technical level after falling in the summer.

"It bounced right off its uptrend in August and you like to see that," said Pytlar. When stocks respond to key technical levels like an uptrend, it shows that investors still believe in the overall story and are willing to commit more capital to the trade. And according to Pytlar's chart work, the index is poised to move even higher.

"It's been consolidating for some time and is moving higher. We like it for further upside," said Pytlar.


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