For the past almost 13 years, the stock market has been mired in a secular bear market. Sure there has been some strong rallies, especially when the market turned in March of 2009. None of the upturns have been able to truly break out and form the basis of a true bull market rally. The blistering rally off the November post-election lows has seen the transports hit five-year highs. True bull market rallies are always led by the transports, as they reflect economic strength. Is the sector now pointing the way to a sustained bull market?

The Bank of America Merrill Lynch transport and trucking analysts are raising their ratings on three transport carriers to Buy from Neutral. These names include United Parcel Service Inc. (NYSE: UPS), Werner Enterprises Inc. (NASDAQ: WERN) and Knight Transportation Inc. (NYSE: KNX). Their upgrades are led by what they believe to be an upward inflection in truckload shipper confidence, upticks in recent international datapoints (Hong Kong Air Cargo Terminals/HACTL, International Air Transport Assoc/IATA, and A4A on the air cargo side and Chinese Port Volume acceleration on the shipping side), as well as following on improving results at truckload operator Swift Transportation Company Inc. (NYSE: SWFT).

The main tipping point for the upgrades came from their biweekly truckload Shipper Survey, which posted its highest confidence level for short-term outlook in four months and its highest ever long-term outlook, auguring well for growing trucker demand. The survey results highlight the inflection in shipper sentiment, as 65% of respondents expect a neutral to negative near-term freight outlook, improving from last survey’s 76% and in line with sentiment levels in early October. The longer-term outlook on freight demand (six to 12 months) had 59% of respondents targeting a positive outlook, the highest level of sentiment since they began the survey. Shippers noted that supply and demand seems in balance currently, and retailers are keeping inventory levels very thin, indicating pockets of strength will drive pricing.

In raising UPS from a Neutral to a Buy, they established a $95 price target. That represents almost a 20% increase from yesterday’s $80.34 close. The street consensus is $86. They raise Werner to Buy and increase the price target to $27 from $23. It closed yesterday at $23.47 and the Thomson/First call estimate is $25.50. Knight Transportation is also raised to Buy with an $18 target, up from $16. Knight closed yesterday at $15.61 and has a street target of $16.

While the transport names may not be the most glamorous on Wall St., they are critical to the success of any sustained bull market. If investors want to participate in the sector but are not sure which individual stocks to buy, they can purchase the SPDR S&P Transportation ETF (NYSEMKT: XTN). This can offer greater diversification and broader exposure to the transport industry.

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