RAILS RIDE THE AGRICULATURAL TRAIN -- ALL FOUR RAIL STOCKS ARE TRADING AT RECORD HIGHS -- INVESTORS ROTATE FROM BONDS TO STOCKS -- S&P 500 TESTS TOP OF THREE-MONTH TRADING RANGE

DOW TRANSPORTS HIT EIGHT-MONTH HIGH ... We've pointed several times the relatively strong performance in transportation stocks. Today's 2% gain pushed the Dow Transports to the highest level since last August (Chart 1). The relative strength ratio (below chart) has been rising strongly since January. That may seem strange in the face of rising oil prices. After all, transportation stocks are sensitive to energy prices. Some have asked if the transportation strength is a sign of a stronger U.S. economy. I don't think so. In order to explain what's happening, however, it's necessary to break the transports down into three different parts.

Chart 1

THE RAILS RIDE AGRICULATURAL BOOM ... Chart 2 shows the relative performance of three transportation groups over the last year. The airlines (red line) are down -45% in that time. Airlines are the most hurt by rising energy prices. Truckers (blue line) have gained +6%. Truckers can pass some of their fuel costs onto their customers. The big gainers have been the rails (black line) which are up 32% over the last twelve months. The DJ US Railroad Index is the only one to reach a new high. The main reason for that is the boom in agriculture. Stocks tied to agriculture (from seeds to fertilizers to farm equipment) have been booming. So are the prices of the grains themselves. Somebody has to move those goods. And the rails are doing most of it.

Chart 2

RAIL BREAKOUTS ... A few weeks back we showed CSX (black line) breaking out to a new record high. As of this week, the three other rails have broken out to new records. They include Union Pacific (blue line), Burlington Northern (BNI), and Norfolk Southern (green line). Since the start of 2007, those four rail stocks have gained 80%, 52%, 37%, and 25% respectively. Over the same time span, the S&P 500 lost -2% and the Dow Transports gained 11%. For those looking to participate in the global agricultural boom, railroad stocks may be just the ticket.

Chart 3

PENDULUM SWINGS BACK TO STOCKS ... This week's market action has been characterized by stock buying and bond selling. The change in the relationship between those two markets is shown in Chart 4 which plots a ratio of the 7-10 Year Treasury Bond Fund (IEF) by the S&P 500 SPDRS (SPY). The falling ratio since October shows that investors have favored bond prices over the last six months. Since mid-March, however, the ratio has turned up. That means that investors are rotating out of bonds and back to stocks. The rise in the ratio isn't enough to signal a major trend change between the two asset classes. But it does show that investors are feeling a bit more optimistic. Rising bond yields gave a boost to the dollar today and caused heavy profit-taking in gold.

Chart 4

MARKET INDEXES TEST TOP OF RANGE ... Today's strong action pushed the major stock indexes up against their three-month highs. [The Dow actually broke through]. The price gains came on heavier volume. NYSE advances led decliners by a four-to-one margin. Chart 5 shows the S&P 500 ending just below its February peak. The day's biggest gainers were industrials (thanks to Caterpillar), technology (thanks to Google), and energy. Oil service stocks were especially strong. Good gains also occurred in financials and consumer discretionary stocks. All in all, a good week for the market. A close over 1400 by the S&P 500 would turn its intermediate trend upward. That would lead to a test of its 200-day average and a down trendline drawn over its October/December highs.

Chart 5