One of the key characteristics of a good trader is the ability to recognize stocks and/or sectors that are at inflection points. I am constantly searching for stocks and sectors making new highs, or for those surging after consistently underperforming the broad market. The reason why is that both of these scenarios present traders with inflection points that can often lead to big profits.

During my search for such inflection points, my friend Tom Essaye, editor of the 7:00’s Report, pointed out to me that the Dow Jones Transportation Average was the best-performing sector in Wednesday’s otherwise uneventful trade. Tom is one of the most astute traders I know, so when he points out a potential inflection point, it’s wise to take note.

The Dow Jones Transportation Average is a sector index that consists of the biggest transportation-related companies, including railroads, delivery services, trucking, airlines, marine transport and various other transportation-oriented firms. Some of the biggest components of the 21-member Dow transport index are Union Pacific Corp. (NYSE: UNP), FedEx (NYSE: FDX), United Parcel Service (NYSE: UPS), Kansas City Southern (NYSE: KSU) and Norfolk Southern (NYSE: NSC).#-ad_banner-#

Investors familiar with the “Dow Theory” of the market are constantly watching the transports, as they play a key role (along with the industrials) in signaling both uptrends and downtrends. Now, I am not so much concerned with Dow Theory here, although it’s certainly nothing to scoff at. What I am more concerned with is that, for some time, we’ve seen a lag in the Dow transports versus the Dow industrials. The former is up just 2.5% so far in 2012, while the latter is up about 7.5%. That relative underperformance means that the transports could be ripe for new buyers seeking value.

Indeed, recent action in the sector could be viewed as a move toward this value trade. The trend in the space also could be a positive harbinger of things to come for the bulls. That’s because, in addition to leading the charge higher of late, the Dow transports also recently broke above both the short-term 50-day moving average, as well as the long-term 200-day moving. Both are key technical levels that often signal more upside ahead.

The chart here of the iShares Dow Jones Transportation Average Index (NYSE: IYT) clearly shows these technical breakthroughs.

IYT is an exchange-traded fund (ETF) that represents a great way to gain exposure to the Dow transports, and at a very attractive cost. With an expense ratio of just 0.47%, you can essentially buy all 21 stocks in the index. The diversification here allows you to take advantage of the trend in the sector without leaving yourself susceptible to individual company risk.

In addition to the technical positives of an IYT trade, there’s a more fundamental reason why this fund could continue to trend higher. Generally speaking, the transports are a barometer for economic activity. If the economy as a whole is improving, then theoretically we are going to see more production of goods, and more need to ship those goods to places throughout the United States, and throughout the world.

Think of the transports as way to read demand for products. If demand grows, then so too will demand for transportation of those goods.

Action to Take –> Now, despite the lackluster growth in the global economy we’ve witnessed during the past year, things are beginning to improve, albeit ever so slightly. If that improvement continues, we are liable to see fundamentals in the transport sector improve as well. That improvement, along with the technical inflection point in IYT, makes the Dow transport trade a worthwhile ride.

This article originally appeared on TradingAuthority.com: This Sector has Reached an Inflection Point… Time to “Buy”