After volatile trading sessions last week, it’s worth noting that the U.S. stock market’s major trend is still up. The market’s sector relative-strength rankings are confirming this, despite the market’s gyrations,
I base this bullish assessment on an analysis of which stock-market sectors typically perform the best as bull markets come to an end. Recent market action doesn’t fit the historical pattern: Many of the sectors that typically rally at the end of bull markets are lagging, while many of those that usually do the worst have instead been standout performers.
This divergence between recent sector relative-strength and the historical pattern is illustrated in the chart below. While this divergence doesn’t guarantee that the bull market is alive and well, it does suggest that investors should not be too quick to give up on it. The S&P 500’s SPX rally to start this week suggests that many investors agree, despite the six consecutive session declines through the end of last week.
Twice in the past year I’ve used the sector relative-strength rankings to grade the market. The first was in early April 2023, when the new bull market was being met with widespread skepticism; I argued that the rankings pointed to an emerging new bull market rather than a correction in a bear market. The S&P 500 on a total-return basis is more than 22% higher since then. The second was in mid-August 2023, when the S&P 500 was — like now — 5% below its recent high; I argued that the weakness did not represent the end of the bull market. The S&P 500 on a total return basis is 15% higher now.
To appreciate how big a divergence exists between the current relative-strength ranking and the historical pattern for bull market endings, consider the rank correlation coefficient between the two. This statistic ranges from a theoretical maximum of 1.0 (when the two rankings are identical) to minus-1.0 (when the rankings are perfectly inverse). This statistic currently stands at minus-0.70, one of the lowest readings in recent decades. Last August, the correlation coefficient stood at minus-0.01, and in April 2023 at plus-0.31. Clearly, the sector relative-strength readings have been moving increasingly further away from the bull-market-ending pattern.
The bottom line? Reports of the bull market’s death may be premature.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com
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